I have been receiving some excellent responses to my earlier piece on the new IRS practice of auditing people who file amended tax returns claiming refunds.  I will pass along and report on these.

There is an interesting slant to this story that I hadn’t considered until I received this email from another CPA:

Mr Guru – I didn’t realize that IRS is now targeting 1040X’s for full audit.  This does put a damper into some of my problem client solutions.  But, just the same, I appreciate your warning.  I’ll see what happens around here regarding this matter.
 
Also, on the Jennings/H&R Block deal, your comment “Their free service offer is worth every penny.”  Jeez, talk about a back-handed slam!  I take it you don’t think highly of H&R BlockHead, right?

My Reply:

There’s actually a connection between those two topics that I didn’t notice until your email.

It has long been a very lucrative part of a tax practice for those of us who believe in truly minimizing taxes for clients in preparing amended tax returns for clients who used H & R Block.  We could very easily recover thousands of dollars in taxes that the clients had overpaid under Block’s legendary wimpy approach to tax preparation, and we had loyal clients who were able to directly compare the two approaches.

This new policy of IRS auditing amended returns with refund claims will put a stop to many of those changes we would normally make to previously filed Block returns.  I have never heard of any connection between Block and this new IRS policy; but you have to admit that this will most likely help them.  I guess we could always still prepare the amended returns for new and prospective clients in order to illustrate the additional taxes they flushed down the toilet by using Block; but warn them not to send the returns to IRS unless they are gluttons for punishment of the audit type.

Thanks for helping me make this connection.

Kerry

 

In Mississippi

In Louisiana

In Florida

In Oregon

In South Florida

House Ends ‘Comedy of Errors,’ Removes Disclosure Provision

A taxing idea for Social Security

Judge won’t continue freeze on Xelan assets – From their local San Diego paper.

As usual, the AARP prefers big government control over everything, including Social Security.

Everson Explains IRS Role in Drafting Disclosure Provision in Omnibus Bill

Earlier, I mentioned a new practice by IRS to instigate full audits of people who file amended tax returns requesting refunds of erroneously overpaid taxes.  Since then, I have had one on one discussions with various IRS personnel, including auditors and even an audit manager; so I am confident that this is a very real issue here in Arkansas.  It is also one that makes me angrier each day as I see more and more people victimized by it and forced to pay thousands of dollars in fees to defend themselves, as well as lose thousands of dollars in overpaid taxes that we are now too afraid to claim. 

Everyone at IRS claimed that this is in fact a national policy and not just isolated in this state.  Not that I don’t trust every single word from IRS employees, but I would appreciate some input from other practitioners around the country as to whether or not they have seen the same practice in their parts of the country.  

According to one auditor, IRS was so embarrassed by their sending out huge checks for people who claimed the bogus slavery tax credit that they decided to scrutinize every amended return requesting a refund.  That was then expanded to incorporate a fishing expedition into everything else on that year’s tax return, as well as on all other years that are still open under the three year statute of limitations, plus occasionally closed years, in an effort to scrounge up more tax dollars.  Rather than train their own employees to be more careful in doing their job, IRS is making all of us suffer. 

I have already held off preparing several amended tax returns, and warned others not to do so, that would have been no-brainers a year ago just to avoid having IRS put us through the hassle of full blown audits.   

I have also been holding off finishing several 2002 and 2003 1040s so that we can be certain of not needing to file amended returns later.  I sent this email to a client this morning who was concerned about not having her 2003 tax info in to me yet.

There’s no rush unless you expect to owe money with the tax return.

It’s much better to take your time to make sure everything is as accurate as possible.  IRS has recently changed its policy on handling amended tax returns.  If we were to whip out a fast tax return with a lot of things that need to be changed, we would be asking for a mess with IRS.  They have recently started a policy of running full blown audits of anyone who files amended tax returns requesting a refund. 

This means that we essentially have only one chance to file an income tax return; so we need to be sure it is as accurate as possible, even if it’s several months late.  I actually have some 2002 tax returns in process, as well as several 2003, that I am holding off finishing until I am as confident as possible that there will not need to be any changes made later on.

I think this new practice by IRS stinks.  Actually, my feelings warrant some stronger language than is appropriate for this family-friendly blog.  I have been raising hell with the Arkansas IRS offices over this, as have some other CPAs in this state.  I am very interested in hearing from practitioners around the country as to your experiences in regard to IRS auditing clients who file amended tax returns requesting refunds. 

I received the following press release today from an attorney involved with the xelan case that was mentioned in the feds’ press release a month ago. I have no personal experience with this group; but it is impressive that they were able to get their bank accounts unfrozen in the face of the serious charges leveled at them by the feds. It is also important to remember that many of us do still believe in the concept of “innocent until proven guilty,” even though official IRS policy is the exact opposite.

COURT UNFREEZES FUNDS AND DISSOLVES RECEIVERSHIP

San Diego, CA — December 3, 2004 — The

United States District Court, for the Southern District of California, Judge Larry A. Burns presiding, declined to grant a preliminary injunction sought by the U.S. Department of Justice, and dismissed a receiver that had been appointed pursuant to a temporary restraining order that the Government secured on November 4, 2004 without the defendants having an opportunity to be heard.

Well over $500,000,000 of the assets of Doctors Benefit Insurance Company, Ltd. (“DBIC”), a Barbados licensed and regulated insurance company, had been frozen by the temporary restraining order, crippling the ability of DBIC to operate during the one month period prior to having its opportunity to be heard in open court.

After a lengthy hearing, Judge Burns told the crowded courtroom that based on the evidence presented, the government had failed to show that it was likely to be successful on the merits of the case, the first prong of a test for the Court to be able to grant a preliminary injunction. He further said that the proportionality of the relief sought by the Governments was out of balance with the harm alleged.

DBIC noted in its papers and argued in court, among other things, that the IRS’ complaint and application for injunctive relief were nothing more than an effort by the IRS to resolve, in its favor, and without litigation, its long running dispute with DBIC’s insurance program, by freezing DBIC’s assets and thereby putting it out of business. DBIC noted that two separate lawsuits had been initiated to attempt to resolve in federal court the IRS’s several year challenge to DBIC’s insurance policies. Rather than proceed with those cases, the IRS chose instead to attempt to freeze DBIC’s assets and have a receiver appointed to run the company, by transforming a dispute over the tax treatment of insurance premiums into an unfounded claim that DBIC defrauded its policyholders. And, perhaps most disturbingly, the IRS based its effort to freeze DBIC’s assets on the declaration of a revenue agent, who did not purport to have expertise in insurance, that he had, based on incomplete information, preliminarily determined that DBIC’s disability insurance was not in fact insurance, or, if it was insurance, that only a portion of the premiums could be deducted.

The Court noted that the IRS had not come to any final conclusions about DBIC’s disability insurance and it declined to grant injunctive relief on the basis of unproven suspicions. The Court further noted that the relief sought by the Government would negatively impact the lives of doctors on disability as well as DBIC’s ability to operate.

DBIC and its predecessor have been writing supplemental disability insurance since 1995. DBIC presented opinions from five respected actuarial firms who had previously reviewed DBIC’s insurance, each stating unequivocally that the disability insurance was in fact “true” insurance, and satisfied all tests for what constituted insurance. DBIC also presented legal opinions written by two respected law firms opining that the disability insurance was “true” insurance.

In addition, DBIC submitted evidence that it had complied with the requirements of the Supervisor of Insurance in Barbados, to whom it regularly submitted audited financial statements and actuarial opinions. Those actuarial opinions confirmed that DBIC’s reserves were redundant — that is, more than sufficient to pay all existing and future expected claims. DBIC also presented the rating report prepared by A.M Best, the world’s leading insurance rating company, which treated DBIC as a bona fide insurance company offering supplemental disability insurance to professionals.

DBIC has published a website containing many of the filed court documents at www.doctorsbenefit.com.