The IRSAC Small Business/Self-Employed Subgroup (hereafter “Subgroup”) consists of four tax professionals from wide-ranging backgrounds. Its members include an attorney, a certified public accountant, a certified payroll professional, a U.S. Tax Court practitioner, and an enrolled agent, serving the tax system in public practice, education and in private industry. The Subgroup’s membership reflects the broad range of taxpayers served by the Small Business/Self-Employed Division of the Internal Revenue Service (hereafter “SBSE”).
The Subgroup enjoys a close working relationship with the professionals within SBSE. This relationship has granted this subgroup an opportunity to consult with SBSE leadership on many issues over the past year; the Subgroup and SBSE consulted both formally and informally on all issues contained in this report.
The Subgroup respectfully recommends the following three actions relating to the three issues raised in this report:
1. Business Identity Theft Awareness
More needs to be done to protect employer identification numbers (EINs) so they cannot be easily used without the EIN owner’s knowledge or permission to obtain a fraudulent refund or to promote individual identity theft schemes.
2. The Fresh Start Initiative
The IRS made many changes to the Fresh Start Initiative program to assist financially-distressed taxpayers, but more can be done to help taxpayers who are struggling to meet their tax obligations.
3. Simplified Home Office Deduction
The IRS now provides a simplified home office deduction for taxpayers who use their home as a business location, but it is limited to 300 square feet and $5 per square foot, which may not adequately represent the costs of maintaining a home office.
ISSUE ONE: BUSINESS IDENTITY THEFT AWARENESS
Business identity theft can be a more complex issue than individual identity theft. While individual identity theft with the Internal Revenue Service is accomplished by filing one fraudulent tax return at a time, business identify theft can occur in many ways. A fraudulent business entity tax return can be filed that generates a larger refund than would be obtained on an individual income tax return due to available refundable business tax credits, or fraudulent W-2 forms with fictitious withholding may be filed and the information subsequently used to file multiple fraudulent individual income tax returns claiming refunds. Similar to individual identity theft, business identity theft also impacts the banking and business communities. Because of the potentially larger payoffs available, business identity theft is on the rise.
The members of IRSAC were asked to provide information on 1) how businesses can reduce their organization’s employer identification number (EIN) exposure, 2) how the IRS can reduce the number of fictitious EINs being established, and 3) what kind of business identity theft outreach is needed from the IRS.
Business identity theft is defined in the Internal Revenue Manual (section 10.5.3.3.1) as “creating, using, or attempting to use business’ identifying information without authority to obtain tax benefits.” Business identity theft can occur with corporations, partnerships, government entities, trusts, estates, and exempt organizations. The theft can be accomplished by using the EIN of an active or inactive business without the EIN owner’s permission or knowledge to file fraudulent tax returns (e.g. Forms 941, W-2s, Form 1120, Form 1041, etc.) to obtain a fraudulent refund or to further perpetuate individual identity theft and refund fraud.
Business identity theft cases can be located in any IRS function and it is likely that a single case will cross functional lines. While in the past identity theft was generally viewed as a crime against individuals, it appears criminals now discovered that stealing business identities may not only be much easier than individual identity theft, it can also result in much larger payoffs.
Business identity theft is not the same as a computer security breach, which can occur at large retailers or medical facilities when private personal information and credit card numbers are hacked or compromised, and can lead to identity theft at the individual level. Business identity theft occurs when a thief actually impersonates the business itself by using the business’ employer identification number and other business credentials, such as name, address, contact information, etc. to create false business filings of various types in an effort to steal from the United States Treasury, financial institutions, creditors, suppliers and others. The focus on this report is the impact that business identity theft has on the IRS and the U.S. Treasury, but as with individual identity theft, the issue extends far beyond tax fraud. Once an identity thief obtains access to a business EIN, the potential for much larger payoffs exists because businesses generally maintain larger bank account balances that could be stolen and they have availability to more funds from loan accounts with higher credit limits. Business creditors may be less likely to question large purchases on credit cards, and smaller businesses and non-profit organizations may not have the layers of internal control, security and oversight necessary to prevent issues.
Greater fraudulent refunds than those claimed on an average individual tax return could be paid by the IRS, since businesses are more likely to claim larger refundable tax credits on the returns they file.
Business identity theft can be readily accomplished because employer identification numbers are easily obtained. While social security numbers receive some level of protection, there is no protection for business identification numbers. Employer identification numbers (EIN) by law are publicly available to every employee to whom the employer issues a W-2 and to every vendor or investor or other individual or business to whom the entity issues a Form1099 U.S. Information Return reporting form. By submitting a Form W-9, Request for Taxpayer Identification Number and Certification, which requests the business EIN or a sole proprietor’s social security number, and carries a penalty for noncompliance, or by making a simple request for this same information by telephone, the requestor can easily obtain the EIN. Non-profit organizations and many for-profit entities are required to make their tax filing information public, including their EIN.
A taxpayer who is a victim of individual identity theft often learns of the theft when an anticipated refund is delayed, but a taxpayer who is a victim of business identity theft may be unaware of the theft for a long time. For example, if false Form W-2s are filed and subsequently used to file multiple fraudulent individual tax returns it can take a significant amount of time for the IRS to match the fraudulent W-2s with the missing Form 941s. This is partially because the Social Security Administration, rather than the IRS, receives the employer’s Forms W-2 and W-3, which adds time to the matching process. Due to the myriad of interrelated filings, business identity theft case resolution is generally more complicated and difficult to rectify and takes longer to resolve than individual identity theft. Because of the various types of business entities that can be involved in business identity theft, the numerous types of possible tax filings involved, and the significant amount of time it takes to reach resolution, highly-skilled and trained IRS personnel are required to work these cases. Sufficient personnel must be devoted to business identity theft to allow one person to handle the case from identification to resolution.
A report issued by the Treasury Inspector General for Tax Administration (TIGTA) estimates the IRS could issue nearly $2.3 billion in potentially fraudulent tax refunds based on stolen or falsely obtained EINs each year. For tax year 2011, TIGTA identified 767,071 electronically-filed individual tax returns with fraudulent refunds based on falsely reported income and withholding. There were 285,670 EINs used on these tax returns. Of these, more than 8,000 were falsely obtained EINs used to report false income and withholding on over 14,000 tax returns, with potentially fraudulent refunds issued totaling more than $50 million. In addition, stolen EINs were used to report false income and withholding on over 700,000 tax returns, with potentially fraudulent refunds issued totaling more than $2.2 billion.
The members of the IRSAC commend the many steps taken by the Internal Revenue Service to address the issue of individual identity theft, including, but not limited to:
- developing and using Form 14039 – Identity Theft Affidavit;
- specific Web pages at irs.gov providing pertinent information for individuals who are victimized by identity theft;
- dedicated points of contact for affected taxpayers; and
- REG-148873-09, IRS truncated taxpayer identification numbers (TTINs) where the IRS issued final rules that allow filers of information returns to truncate a taxpayer’s identification number on payee statements and other documents, including social security numbers and employer identification numbers of payees. These new rules are generally effective for payee statements due after December 31, 2014.
- Because employer identification numbers (EINs) are readily accessible to the public, more needs to be done to protect them. We recommend expansion of REG-148873-09 truncation guidance to include truncated employer identification numbers (TEIN) of issuers on any copies of IRS filings that are provided to outside parties or made public, or to any forms not submitted to the IRS. For example Form 8879, E-file Signature Authorization, which is subject to exposure due to the fact that many times it is either posted in the U.S. mail or emailed between taxpayers and their tax professionals, authorizes the tax professional to electronically file the tax return and is retained in the tax professional’s office for inspection at the IRS request. Full EINs should only be provided on documents actually filed with the IRS.
- Develop and implement procedures where a taxpayer must surrender an EIN that is no longer in use because the business is closed or no longer in service. When the IRS receives notification that an EIN is inactive as of a particular date, any subsequent use of the EIN should trigger an alert that the IRS can respond to in less time than it now takes to learn a business identity theft occurred.
- Include a specific Web page at irs.gov that describes what to do if a taxpayer has been a victim of business identity theft (see /uac/Taxpayer-Guide-to-Identity-Theft). This page should provide guidance to business entities and include tips to avoid business identity theft and links to education on proper business transition procedures, proper business closure steps and a link to Form 14039-B, Business Identity Theft Affidavit. References on this page can be updated to also include what to do if a taxpayer believes their EIN has been used improperly.
- Increase awareness of Form 14039-B, Business Identity Theft Affidavit, and make it more readily available to taxpayers who are victims. This can be accomplished through outreach to stakeholders groups and the Web page link previously noted.
- Provide a dedicated point of contact for victims of business identity theft. Because of the complexity of business identity theft issues, these cases cannot be handled by the same IRS personnel who handle individual identity theft without additional training that allows the IRS to effectively develop business identity theft specialists to work with victims.
- Many of the current business identity theft cases at the IRS result from the invalid issuance of a new EIN. The IRS has already taken steps to reduce the number of EINs that can be obtained to one per day. Unfortunately, this can hamper tax professionals who are trying to legitimately obtain EINS for their trust and estate clients, but may not stop thieves from obtaining fraudulent EINS. The IRSAC recommends the IRS use the e-authentication system Out-of-Wallet questions to verify that the request is valid. This would require that anyone wishing to obtain an EIN verify his or her identity through a series of personal questions that only that individual would know. This may add a few more minutes to the process but the additional security could prove worthwhile.
ISSUE TWO: THE FRESH START INITIATIVE
The Fresh Start Initiative is a series of changes to IRS Collection policies and procedures designed to help individuals and small businesses with overdue tax liabilities. The Fresh Start initiative makes it easier for individual and small business taxpayers to pay back taxes and avoid tax liens. The Fresh Start initiative makes fundamental changes to the IRS’ lien program and other collection tools.
The members of the IRSAC were asked to provide feedback on the effectiveness of current Fresh Start Initiatives, including ways that the Internal Revenue Service can improve these initiatives, ideas for future Fresh Start initiatives that the IRS can implement without legislative changes, and suggestions for marketing current and future Fresh Start initiatives.
The Fresh Start Initiative makes it easier for individuals and small business taxpayers to pay back taxes and avoid tax liens that can harm their credit and impede their ability to borrow funds. The recent economic downturn left many taxpayers struggling to pay their income tax obligation in full. The IRS has many voluntary programs available for taxpayers, but statistics provided by the IRS indicate declines in voluntary program use, possibly due to the government shutdown, reduced potential direct case time, and decreased staffing in both field and campus locations:
- Offer in Compromise receipts are down by 8.7 percent from June 2013 to June 2014.
- Currently not collectible cases decreased 14 percent compared with June 2013.
- The number of liens prepared, withdrawn and released declined 13.1 percent, 4.3 percent and 6.2 percent respectively during the same time period.
- Installment agreements established are up by 1 percent for the third quarter of FY 14 compared with FY 13, potentially due to staffing declines.
- Online Payments Agreements (OPAs) are down by 18.1 percent, FY 14 compared with FY 13, potentially the result of system or authentication challenges.
When taxpayers owe the IRS they can make voluntary payments either by paying the full amount due or by making arrangements with the IRS to make payments over a specified time period. The IRS offers installment agreements that will either partially or full pay the balance.
There are fees for entering into installment agreements, depending on whether the payment is directly debited from the taxpayer’s bank account or made by a check sent to the IRS, and the appropriate interest and penalties continue to accrue until the balance is paid in full. The IRS’ successful marketing of the Direct Debit Installment Agreements (DDIA) contributed to an increase in DDIAs of 24.2 percent from June 2013 to June 2014. DDIAs reduce taxpayer burden by directly debiting the taxpayer’s bank account and offers a lower user fee; the benefit to the IRS is a lower default rate.
Taxpayers can submit an offer in compromise (OIC) to settle the tax debt for less than the full amount due. Acceptance of an OIC requires that the amount offered be based on the reasonable collection potential of the taxpayer’s assets and future income over a 12 or 24 month period of time, depending upon whether the offer is considered a cash payment or a periodic payment. It can take the IRS up to two years to investigate an OIC, and there is an initial $186 non-refundable application fee that must accompany the application. The fee and all payments received are applied to the account. A waiver of the fee and payment is granted to taxpayers meeting low income guidelines; the low income waiver and guidelines are included on the OIC application form. The paperwork is complex and the OIC may be returned as unprocessable if all the requested paperwork is not submitted.
When taxpayers either do not pay the amount they owe or are unable to honor payment arrangements previously made, the IRS has many collection options available to them. The IRS can levy bank accounts or wages or record a Notice of Federal Tax Lien (NFTL) that notifies others that the IRS has an outstanding claim against the taxpayer.
A NFTL documents the government’s legal claim against a taxpayer’s property, and it protects the government’s interest in all of the taxpayer’s property, including personal property and financial assets. The NFTL is a public document that alerts creditors that the government has a legal right to the taxpayer’s property; having a lien filed can impair a taxpayer’s ability to secure credit, rent property, find employment or make a purchase or any other activity that requires a credit check.
Although a lien will be released within 30 days of the payment in full of all outstanding taxes, interest and penalties, it continues to appear on the taxpayer’s credit report as a satisfied debt. A lien can also be discharged or removed from specific property. If the lien is subordinated, which allows other creditors to move ahead of the IRS, it may be easier for the taxpayer to obtain a loan. When the lien is withdrawn, it removes the public NFTL, which assures other creditors that the IRS is not competing for the taxpayer’s property, but the taxpayer remains liable for the liability due to the IRS.
Fresh Start Initiatives
In the face of the economic downturn, the IRS has made a number of changes to assist financially distressed taxpayers. In late 2008, the IRS announced an expedited process to make it easier for financially-distressed homeowners to avoid having a NFTL block refinancing of mortgages or the sale of a home. By reducing the processing time to request a discharge or subordination of a tax lien, taxpayers were able to access their home equity by sale or refinance to pay their IRS debt.
On January 16, 2009, the IRS announced additional steps to assist financially- distressed taxpayers, giving IRS employees more flexibility to work with taxpayers. Collection employees were given greater authority to suspend collections actions, without financial documentation, in some hardship cases where the taxpayers were unable to pay. The IRS employees were also given the ability to allow either a skipped or a reduced monthly payment when taxpayers lost their job or suffered another financial hardship, without automatically terminating an installment agreement. The IRS allowed a second review of home equity information to determine if it was appropriate to accept an OIC to satisfy the debt. Other options were made available to taxpayers who were unable to meet their obligations to help them avoid default. For instance, expedited levy releases eased requirements on taxpayers who requested expedited handling for hardship reasons that would allow them to sell or refinance their residence.
The Fresh Start Initiative increased the NFTL filing threshold from $5,000 to $10,000, although NFTLs can still be filed on amounts less than $10,000 when circumstances warrant. The criteria for accepting an OIC were also eased, basing the reasonable collection potential (RCP) calculation on only 12 or 24 months of future income.
On March 7, 2012, the IRS announced a major expansion of its Fresh Start Initiative by providing penalty relief to the unemployed and making streamlined installment agreements available to more people. Certain taxpayers who have been unemployed for 30 days or longer were able to avoid failure-to-pay penalties by providing a six-month grace period if a wage earner was unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17, 2012 deadline for the 2011 return, or if a self-employed individual experienced a 25 percent or greater reduction in business income in 2011 due to the economy. This penalty relief was available for balances under $50,000 and was subject to income limits. It was not available if a taxpayer’s income exceeded $200,000 if he or she filed as married filing jointly or $100,000 if he or she filed as single or head of household.
At the same time, to help more people qualify for the program, the IRS raised the threshold for using an installment agreement without having to supply the IRS with a financial statement from $25,000 to $50,000. The Online Payment Agreement (OPA) allows qualifying taxpayers to set up an installment agreement without even speaking with an IRS assistor. Penalties were reduced, although interest continues to accrue on the outstanding balance. Payments must be made by direct debit for taxpayers to qualify for the new streamlined installment agreement.
The members of the IRSAC understand from other practitioners that Fresh Start is accomplishing its goal and is providing a positive experience for practitioners and taxpayers by reducing the time and effort required to prepare an offer in compromise and enter into installment agreements. The members of the IRSAC commends the IRS for its efforts to bring the Fresh Start Initiative forward to remove obstacles and assist struggling taxpayers and to broaden the number and type of taxpayers who can benefit from these initiatives. The Fresh Start Initiative not only reduces taxpayer burden, but also enhances taxpayer voluntary compliance for those taxpayers who are able to use the program.
Taxpayers Not Served by the Fresh Start Initiative
There are taxpayers who are not yet served by the Fresh Start Initiative. When a taxpayer requests an installment agreement for larger tax liabilities (generally those exceeding $50,000) or proposes an OIC, the IRS applies collection financial standards to determine the amount of payment the IRS expects a taxpayer can make. Those standards include expenses that meet the “necessary expense” test, which is defined as reasonable expenses that are necessary to provide for a taxpayer’s and his or her family’s health and welfare and/or production of income. The total necessary expenses threshold establishes the minimum a taxpayer and family need to live and serves as the basis for granting installment agreements and offers in compromise when financial information must first be collected by the IRS.
Collection Financial Standards
In October 2007, the IRS revised its Collection Financial Standards. Although the IRS issue revised standards annually, most recently in March 2014, they have not varied significantly from the revised 2007 standards, which essentially employ a “one size fits all” rule. As a result, the lowest income family receiving food stamps is allowed the same amount for food and clothing as a middle class family that does not receive any subsidy.
The current standards do not recognize the varying cost of living in different regions and communities because, beginning in 2007, the IRS eliminated differentials for Hawaii and Alaska, our two most expensive states. Many of the country’s major metropolitan areas also have very high costs of living including New York, Los Angeles, San Francisco and Washington, D.C.
National Standards: These standards establish reasonable amounts for five categories of necessary expenses food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous. These standards are derived from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey. Taxpayers are allowed the total monthly National Standards amount for their family size, without consideration of the amounts they actually spend. Generally, the total number of persons allowed for National Standard expenses should be the same as those allowed as exemptions on the taxpayer’s current year income tax return, although reasonable exceptions are permitted if they are fully documented, e.g., to accommodate for foster children or children for whom adoption is pending.
Out of Pocket Health Care: These standards establish reasonable amounts for out-of-pocket health care costs including medical services, prescription drugs, and medical supplies including eyeglasses and contact lenses. The table for health care allowances is based on Medical Expenditure Panel Survey data. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend.
Local Standards: These establish standards for two necessary expenses: housing (including utilities) and transportation. Taxpayers will normally be allowed the lesser of the local standard or the amount they actually pay. Deviations from the local standard are not allowed merely because it is inconvenient for the taxpayer to dispose of valued assets or reduce excessive necessary expenses. For housing and utilities, the standards are established for each county within a state and are derived from Census and BLS data. The standard for a particular county and family size includes both housing and utilities allowed for a taxpayer’s primary place of residence. Housing and utilities standards include mortgage (including interest) or rent, property taxes, insurance, maintenance, repairs, gas, electric, water, heating oil, garbage collection, telephone and cell phone.
The standards are not differentiated further and there can be wide variations in housing costs within a county. For example, Orange County, California, includes the relatively poor neighborhoods found in central Orange County cities like Santa Ana, where rents for a one or two bedroom apartment can range from $858 to more than $2,000 per month to more affluent neighborhoods in south Orange County like Lake Forest, where rents for a one or two bedroom apartment can range from $1,325 to more than $3,000 per month. The current local standards for Orange County allow a maximum housing and utility cost for 1 person of $2,486 and a family of 5 or more of $3,486.
The transportation standards consist of nationwide figures for loan or auto lease payments (referred to as ownership costs) and additional amounts for automobile operating costs broken down by Census region and Metropolitan Statistical Area (MSA). Operating costs include maintenance, repairs, insurance, fuel, registrations, licenses, inspections, parking and tolls. If a taxpayer has a car payment, the allowable ownership cost added to the allowable operating cost equals the allowable transportation expense. If a taxpayer has a car, but no car payment, only the operating cost portion of the transportation standard is generally used to figure the allowable transportation expense. There is a single nationwide allowance for public transportation for taxpayers without a vehicle. If the taxpayer owns a vehicle and uses public transportation, actual expenses incurred may be allowed if necessary for the health and welfare of the individual or family, or for the production of income.
Other Expenses: These expenses may be allowed if they meet the necessary expense test. The amount allowed must be reasonable considering the taxpayer’s individual facts and circumstances.
Conditional Expenses: Conditional expenses do not meet the necessary expense test, but may be allowable if the tax liability, including projected accruals, can be fully paid within six years. The amount allowed for necessary or conditional expenses depends on the taxpayer’s ability to pay the liability in full within that time. If the liability can be paid within six years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses; even if payment cannot be made within six years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses for up to one year in order to modify or eliminate the expense. [IRM 22.214.171.124.1]
Taxpayers who owe higher balances require IRS assistance to obtain a payment plan or to compromise the IRS debt. After completing the financial information on Form 433-A (OIC) Collection information Statement for Wage Earners and Self-Employed Individuals and Form 433-B (OIC) Collection Information Statement for Businesses, the taxpayer and the IRS representative discuss the taxpayer’s assets, income and monthly expenses, and Automated Collection Service (ACS) representatives or a revenue officer compare the taxpayer-reported amounts with the National Standard tables in order to arrive at the greatest monthly amount the taxpayer can afford to pay.
The Internal Revenue Manual (IRM ) specifically notes that national and local expense standards are guidelines and that deviations are allowed if it is determined that the standard amount is inadequate to provide for a specific taxpayer’s basic living expenses. Taxpayers must provide reasonable support for the requested deviations, which must be documented in the case file.
With respect to offers in compromise, section 7122 of the Internal Revenue Code provides: “(A) In General – in prescribing guidelines under paragraph (1), the secretary shall develop and publish schedules of national and local allowances designed to provide for basic living expenses. (B) Use of schedules. The guidelines shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph (A) is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses.”
With respect to installment agreements, the IRM 126.96.36.199.6 91 provides that “Guidelines are designed to account for basic living expenses. In some cases, based on a taxpayer’s individual facts and circumstances, it may be appropriate to deviate from the standard amount when failure to do so will cause the taxpayer economic hardship.”
Many IRS collection employees do not exercise discretion when applying the standards. There may be different reasons for this: employees may not be thoroughly trained in procedures, or may not feel empowered or possess the confidence to vary from them. Employees in ACS seem even less likely to be flexible than revenue officers when applying the standards initially, although an Appeals employee is more likely to vary from the standards when handling a collection appeal. The failure to exercise discretion results in more defaulted installment agreements, reduces the number of accepted offers in compromise, and effectively encourages taxpayers to seek bankruptcy relief from tax obligations. The IRS can increase total tax collections by empowering its employees to exercise greater flexibility in applying the standards.
The determination of allowable expenses can be particularly problematic with respect to taxpayers in high cost areas, since the IRS is applying a more stringent standard to taxpayers than it uses with respect to federal government employees. Federal employees in high cost Metropolitan Statistical Areas (MSAs) are granted Cost of Living Allowances (COLAs) to account for those higher costs. A similar application of COLA allowances overlaid on the adjustments to the standards would be fairer to taxpayers in high cost metropolitan areas like New York, or states such as Alaska and Hawaii.
More fundamentally, expense standards inherently fail to account for the substantial variance in living expenses in various communities and discriminate against urban dwellers compared with more rural dwellers. Unquestionably, the cost of living is higher in Washington, D.C. than in Abilene, Kansas, and yet there are no adjustments made for these differences. The IRS should revise its standards to allow cost of living adjustments for taxpayers in high cost communities that are equivalent to those provided to federal employees residing there. The collection standards also fail to adequately acknowledge that some taxpayers may need to maintain higher professional standards in their dress, personal appearance, and vehicle, so that for production of income, a realtor, corporate executive, or physician may have different “necessary expenses” than an employee who is able to wear a work-provided uniform or drive a company-provided vehicle.
- Make the Fresh Start NTFL withdrawal feature available equally to all business entities served by SBSE. That brings parity to sole proprietors and other small business entities by expanding the availability of lien withdrawals to encompass all small businesses. Under the current program, individuals who file Schedule C with Form 1040 are eligible for lien withdrawals under the Fresh State Initiatives, but similarly situated small corporations or partnerships are not entitled to this same relief.
- Consider increasing the NFTL filing from the current $10,000 threshold to $20,000 or $25,000 for individuals and businesses. NFTLs can still be filed on lower amounts when circumstances warrant, but this can reduce the burden on taxpayers who owe the IRS and will see their credit costs rise due to the negative effect a federal tax lien creates.
- The IRSAC recommends that the IRS increase its marketing efforts to reach the taxpaying public and tax professionals. The IRS should highlight its efforts by:
- Prominently displaying the Fresh Start Initiatives on the landing page of irs.gov, especially during March and April when taxpayers are working to meet their tax filing obligations, but may not be able to meet their tax paying obligations.
- Prominently displaying the Fresh Start Initiative with notices or bills sent to qualified individual or small business taxpayers as a reminder of the relief available.
- The IRS should provide information about the Fresh Start Initiative to the various tax professional and industry groups and ask their assistance in reminding their members that this valuable option is available to assist their struggling taxpayer clients.
- The IRS can increase marketing efforts during the January through April filing season using electronic media and newsletters that are geared toward the Wage and Investment and Small Business Self-Employed taxpayers who are most likely to need this option.
- The IRS can create a YouTube video highlighting the Fresh Start Initiative and how they can help a taxpayer who owes the IRS. This outreach may be especially effective for younger taxpayers who are more likely to use YouTube as a source of information.
- The IRS should implement the following changes to enhance the fairness and effectiveness of its Collection Financial Standards:
- Implement a system to apply COLAs to the National Standards for each MSA.
- Publish the COLA adjustment standards on the IRS website with the standards. Train each IRS collection employee on the application of COLAs to the standards. Clearly note on the website that IRS employees have discretion to vary from the standards so taxpayers know they can request deviations.
- Implement a system that encourages employees to use the discretion allowed them under the program terms to evaluate the individual facts and circumstances of each taxpayer. The current system discourages employees’ use of discretion in reviewing the complex circumstances of individual taxpayers, thereby creating cases of undue hardship.
- Create a range of expenses within which individual ACS employees can deviate from the standards without managerial approval. This would empower employees to make decisions on allowable expenses based upon the individual facts and circumstances of the taxpayer.
- Revise Publication 594 The Collection Process to reflect the changes noted above and to emphasize those IRS employees may exercise discretion when applying the Collection Financial Standards.
- Implement an extensive training system to inform collection employees of their duty to review the individual facts and circumstances of a taxpayer before routinely applying the Collection Financial Standards. Each employee should be empowered to vary from the standards in appropriate circumstances. Frontline collection managers must encourage their subordinates to apply the Collection Financial Standards fairly and to vary from those standards in appropriate cases.
- Train ACS representatives to use discretion when resolving a collection matter. While the name ACS connotes a computer-driven system, its effective operation requires both human and automated elements. Using ACS is efficient to track deadlines, account for tax balances due (including interest and penalties), process powers of attorney, track correspondence, and issue notices from a simple installment plan payment reminder to notices of levy. But the computers are only as efficient as the people who provide them with input. This is where the breakdown in efficiency at ACS occurs as ACS representatives vary widely in their approach to the taxpayer or his agent, and this should not be the case. It appears that some ACS employees are less unwilling than others to work with the taxpayer’s unique issues and work out a “best possible” solution for future tax compliance. The differences can sometimes be traced to the location of the call center since calls made at different times during the day are handled differently. It benefits both the IRS and the taxpayer for IRS management to remind ACS representatives that they have flexibility to exercise discretion when deciding whether to place liens, delay levy notices, or adjust installment payments to maintain taxpayer compliance and reduce the chance of default.
ISSUE THREE: SIMPLIFIED HOME OFFICE DEDUCTION
The members of the IRSAC were requested to provide feedback about, and recommendations for, additional outreach on the simplified home office deduction.
If taxpayers use a portion of their home exclusively and regularly for business, or storage of inventory or product samples, or for daycare facilities, they can deduct an amount allocated for their home office. The deduction is also available to employees if the home office is maintained for the convenience of the employers. Prior to 2013, if the qualifying use tests were met, the home office deduction required that taxpayers report the ratio of their business square footage to the total available square footage and apply that ratio to their indirect and direct home office costs.
In 2013, the IRS issued Revenue Procedure 2013-13, which provides an optional safe harbor method for small business/self-employed taxpayers to determine the amount of deductible expenses a taxpayer may claim for the use of a home office. The IRS provided this method to reduce the administrative, recordkeeping and compliance burdens on taxpayers who qualify for the home office deduction. The option became effective for taxable years beginning on or after January 1, 2013. Earlier in 2014, the members of the IRSAC were asked to provide feedback of how the IRS could increase awareness of this new method during filing season; now IRSAC has been asked to provide additional feedback and recommendations on the method.
The simplified home office option allows a deduction of $5 per square foot of home used for business up to a maximum of 300 square feet, or a total of $1,500 per year. Under this method, there is no reduction in the allowable home-related itemized deductions claimed on Schedule A, including mortgage interest and real estate taxes. No separate deduction can be claimed for depreciation and there is no later recapture of depreciation for the years the simplified home office option is used. Taxpayers may choose either the simplified method or actual expenses for any taxable year and may alternate between the two methods. Based on statistics for 2010 and 2011 tax return filings, approximately 4,000,000 taxpayers claimed the home office deduction each year by filing Form 8829 Expenses for Business Use of Your Home, which represents approximately 3 percent of all returns filed.
The IRSAC commends the IRS’ efforts to reduce the burdensome recordkeeping requirements on taxpayers who claim the home office deduction and suggests that when evaluating the effectiveness of the simplified method the following situations should also be considered:
- Most taxpayers desire to maximize their allowable deductions. Because of this, taxpayers may still need to calculate the actual home office deduction and the simplified home office deduction, in order to determine which method will provide greater tax savings. In this case the estimated time savings in calculating the home office deduction using the simplified method will not be experienced.
- Some taxpayers use more than 300 square feet of their home for business, so the actual expense method (as calculated on Form 8829) may be more advantageous.
- Because of differences in the prevailing real estate costs and the varying occupancy costs of home mortgage interest, real estate taxes, insurance and utilities, the actual costs of a home office vary greatly within the United States. As a result, the $5 per square foot value may not fairly represent the cost of the home office in every location.
- While the simplified method will be useful to many taxpayers, some taxpayers will find it more advantageous to use the actual expense method, as discussed below:
- Some states, such as Pennsylvania, do not follow the federal guidelines for home office deductions. Taxpayers in these states must still calculate the actual expense deduction for their state income tax deduction and are likely to have limited use for the simplified method on their federal tax return.
- Taxpayers who experience a loss on their business may carryover their home office deduction if they use an actual expense, which allows a tax benefit in subsequent years when they have income. This benefit is not available for users of the simplified method since there is no carryover allowed.
In an effort to make the simplified home office deduction more attractive and possibly more widely used:
- Create a home office deduction “How To” video which can be used in multiple ways such as posting a link on the IRS website, marketing it in newsletters, highlighting it in seminars and forums, reaching out to stakeholder groups to solicit their assistance to publicize it, and issue a press release to highlight it. The IRSAC recommends it would be advisable to work with the IRS communications team in conjunction with stakeholder public relations teams to utilize main stream media where possible. The IRSAC feels that high profile spots on television and radio would be most effective and could be achieved by working with the Ad Council and other outside groups, including professional organizations.
- Update Publication 587 Business use of Your Home to include the website link for the “How To” video and other relevant information.
- Institute more outreach and education using YouTube, Facebook, Twitter, electronic newsletters and distribution to professional and industry organizations to increase taxpayer awareness of this simplified method.
- Reach out to stakeholders and state and local governments for assistance in highlighting the deduction through publication in their newsletters and on their websites, development of small business workshops and inclusion in seminars and educational opportunities.
- Increasing use of the Simplified Home Office deduction can reduce IRS burden when verifying the home office deductions claimed using the actual expense method (Form 8829). Streamlining the examination process can occur if more taxpayers are encouraged to utilize the simplified home office deduction. To achieve this, the IRSAC offers the following recommendations:
- Recalculate the per square foot allowance by location based on Bureau of Labor statistics.
- Consider allowing the application of the per square foot allowance to all square footage used for business purposes instead of limiting it to 300 square feet.
- Allow for the carryover of disallowed deductions due to business losses based on the carryover guidelines that currently exist for the actual cost method.
 Source: Treasury Inspector General for Tax Administration Report, “Stolen and Falsely Obtained Employer Identification Numbers Are Used To Report False Income and Withholding”, September 23, 2013, Reference Number: 2013-40-120
 Note: Vehicle Operating standards are based on actual consumer expenditure data obtained from the BLS, adjusted using Consumer Price Indexes (CPI) to allow for projected increases throughout the year (These CPI are used to adjust all allowable living expenses (ALE) standards.). Vehicle operating standards are not based on average commuting distances. Fuel costs, which are part of Vehicle Operating Costs, have a separate fuel price adjustment which is based on Energy Information Administration (EIA) data which allows for projected fuel price increases.