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IRS Collections from their mouth

This is an article taken from the IRS by their own collection team. It seems they are busy at work and crunching numbers to further their collection efforts. IRS Collections is hard at work.

With the onset of 2015, I made a New Year’s resolution to restart my blog and provide periodic insights and observations on U.S. tax administration. The New Year also coincides with the issuance of my Annual Report to Congress. Selecting 20 of the most serious problems of taxpayers for this report is always a challenge, because there are so many things to write about. Each year I establish a theme for the report, which provides a framework for selecting the problems but can exclude many important issues. The blog can help bring some focus on these issues and the work that the Taxpayer Advocate Service (TAS) and others are undertaking in those areas.

My collection advisors and I spend a lot of time dealing with collection issues and analyzing collection data. It is fitting, then, that my first blog of the New Year takes a closer look at the IRS’s collection performance.

The Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98) provided the IRS Collection operation with a mandate to improve service for taxpayers, and reduce its reliance on liens, levies, and seizures to collect tax debts.

The IRS Collection operation was the subject of considerable attention in the IRS Restructuring and Reform Act of 1998 (RRA 98). Key components of the legislation were designed to enable the IRS to more effectively use collection payment options, such as installment agreements (IAs) and offers in compromise (OICs), to enhance taxpayer compliance, and make it easier for taxpayers to enter into these types of alternative payment arrangements. In regard to OICs, Congress expressed an interest in having the IRS adopt a “liberal acceptance policy” in order to “provide an incentive for taxpayers to continue to file tax returns and continue to pay their taxes.”(1)  In developing the legislation, Congress was clear in its stated belief that “the ability to compromise tax liability and to make payments of tax liability by installment enhances taxpayer compliance.”(2)

Conversely, RRA 98 also addressed reported abuses by the IRS pertaining to the use of its formidable collection enforcement tools, specifically liens, levies, and seizures. The IRS differs from other creditors because it possesses the ability to undertake significant collection actions without the necessity of going to court and seeking a judgment. In the development of RRA 98, Congress expressed the belief that “the imposition of liens, levies, and seizures may impose significant hardships for taxpayers.” (3) Consequently, RRA 98 contained a number of new provisions designed to limit the use of these tools in certain situations, as well as new review and approval requirements for liens and levies. RRA 98 also created new avenues for taxpayers to appeal IRS enforcement actions, most notably through Collection Due Process (CDP) hearings.

The implementation of RRA 98 proved to be a challenge for the IRS, and most notably for the Collection operation. In retrospect, much more attention was afforded to declines in the numbers of IRS enforcement actions than was given to efforts to improve revenue collection and compliance through the expanded availability of payment options. In its May 2002 report, the United States General Accounting Office – now known as the Government Accountability Office (GAO) – commented on the IRS’s decreasing use of enforcement sanctions, noting that the number of liens, levies, and seizures “dropped precipitously” between fiscal years (FY) 1996 and 2000. (4) A commonly held perception following the implementation of RRA 98 was that the reductions in liens, levies, and seizures reflected a general decline in IRS enforcement, particularly with respect to the IRS Collection operation, and that the IRS’s new emphasis on taxpayer service was incompatible with a robust collection program. In fact, later discussions of collection program results commonly compared lien and levy activity with pre-RRA 98 levels, and increased activities in these enforcement areas were cited as improvements in IRS performance. (5)

IRS data reveal a very weak correlation between the raw numbers of collection enforcement actions and the collection of delinquent tax dollars.

As illustrated in the chart below, IRS data reveal that the substantial reductions in liens and levies that the IRS experienced post-RRA 98 had no discernible impact on the collection of delinquent revenue during this period. (6) IRS defines the term “Total Collection Yield” to include dollars collected on unpaid assessments in the notice stream, collections from taxpayer delinquent accounts (“TDAs”, i.e., cases assigned to or awaiting assignment to Collection personnel), installment agreements, deferred accounts, and non-master file accounts. (7)

Graph of Levies Issued, Liens Filed and the collection yield from Fiscal years 1994 to 2001

Unfortunately, the IRS’s preoccupation with the volumes of lien and levy actions hampered efforts to identify the collection treatments that successfully delivered this revenue with the aid of improved taxpayer service, e.g., timely personal contacts and more flexibility in the use of payment options such as installment agreements and offers in compromise.

In FY 2015, the IRS Collection operation faces an environment that is in many ways remarkably similar to the years following the implementation of RRA 98. Severe budget cuts have contributed to reductions in Collection staffing. From the end of FY 2010 to the end of FY 2014, ACS permanent staffing has declined by over 31% and revenue officer staffing has declined by over 27%. (8) Moreover, significant changes in IRS collection policies implemented in FY 2011 and 2012, i.e., the so-called IRS “Fresh Start Initiative,” have placed greater emphasis on more flexible collection decisions, as opposed to increased use of traditional enforcement actions. As a result, from FY 2010 to 2014, levies issued by the IRS decreased by 45%, (9) and lien filings decreased by 51%. (10) Remarkably, Total Collection Yield increased by 14% in nominal dollars during this period, despite the dramatic decreases in traditional enforcement actions. (11)

Graph of Levies Issued, Liens Filed and the collection yield from Fiscal years 2010 to 2014

Even more remarkably, inflation-adjusted Total Collection Yield increased by 1.7% between FYs 2010 and 2014, demonstrating that collection revenue has been relatively stable over time despite significant swings in IRS lien and levy activity. (12)

Graph of total collection yield adjusted for inflation, 2010-2014

As illustrated in the chart below, revenue collected through installment agreements and collection notices was the primary driver for the increase in Total Collection Yield, with increased collections through refund offsets also making some contributions. Notably, collection through initial IRS collection notices is voluntary – albeit late – compliance (i.e., no lien or levy prompted the taxpayer’s payment), and collection by refund offsets is a fully automated approach that does not require IRS lien or levy authority.

Graph of the percent change of the drivers of collection yield from 2010 to 2014

One might attribute the increase in Total Collection Yield to the overall increase in taxpayers. Between FY 2010 and FY 2014, the number of individual taxpayers increased by about 5%, while the number of business taxpayers remained stable. IRS data, however, disproves this assumption. As the chart below shows, the TDA dollars available for collection decreased slightly between FYs 2010 and 2014, from $174 billion to $173 billion. (13) At the same time, the number of liens issued decreased by about 50%, from almost 1.1 million to 536,000. Yet the percentage of dollars available for collection that were actually collected increased from 6.0% to 6.4%. The chart below shows even more dramatically the relationship between liens filed and available dollars collected.

Graph of available dollars, NFTLs file, and percent of available dollars collected from FY 2010-2014

We see the same pattern with levies issued. Specifically, the number of levies declined by 45% from FY 2010 to FY 2014, while the percentage of available dollars collected decreased slightly.

Graph of available dollars, percent of available dollars collected, and levies issued from fiscal years 2010 to 2014

Now, there are many factors that influence Total Collection Yield. But these data certainly indicate that something other than the raw number of lien and levy issuances accounts for the relative stability of collection revenue over time. In my next blog, I’ll explore what that “something” might be.


  1. Senate Committee Report (S. Rep. No. 105-174) at 88 (1998).
  2. H.R. Conf. Rep. No. 105-599 at 287 (1998).
  3. Senate Committee Report (S. Rep. No. 105-174) at 78 (1998).
  4. GAO, Impact of Compliance and Collection Program Declines on Taxpayers, 12 (May 2002).
  5. IRS, Statement by IRS Commissioner Mark W. Everson, IRS Improves Enforcement and Services in 2005 (Nov. 2005). This press release noted that “In our collection activities, levies and liens have recovered to pre-RRA ’98 levels.” (Emphasis added) IRS, Statement by IRS Commissioner Mark W. Everson, Fiscal Year 2006 Enforcement and Service Results (Nov. 2006). This press release noted, “Overall, some of our most common enforcement tools at the IRS also showed increases. In our collection activities, levies and liens continue to top their 1998 levels.” (Emphasis added)
  6. IRS Data Book 1997 to 2001. In FY 1997, the IRS reported a total collection yield of $29,913,365, while also reporting the issuance of 3,659,000 levies and the filing of 544,000 liens. In FY 2000, levy issuances had dropped to 220,000 and lien filings totaled 288,000. However, total collection yield for FY 2000 was reported as $29,935,564 – slightly more than FY 1997. In FY 2001, after several years of reduced lien and levy activity, the IRS reported total collection yield of $32,186,839 – an eight% increase over FY 1997, even though the approximately 674,000 levies issued remained at only 18% of the FY 1997 level.
  7. This blog features the “total collection yield.” The IRS publishes the total collection yield from unpaid assessments in Table 16 of the IRS Data Book. It shows the dollars collected on previously unpaid assessed taxes plus assessed and accrued penalties and interest and includes dollars collected from delinquency notices, TDAs, installment agreements, deferred accounts and non-Master File accounts. Assessed tax may result from voluntarily filed returns, examination of taxpayers’ returns, or a combination of both.
  8. ACS staffing was extracted from the IRS Human Resources Reporting Center as of the last pay period of a fiscal year. We computed Wage and Investment and Small Business and Self-employed ACS staffing from employees in job series 962. We determined revenue office staffing from Small Business and Self-employed employee in job series 1169
  9. IRS, Collection Activity Reports, NO-5000-24, Levy and Seizure Report (FY 2010 to 2014).
  10. IRS, Collection Activity Reports, NO-5000-25, Liens Report (FY 2010 to 2014).
  11. The IRS defines Total Collection Yield for these years as, dollars collected through collection activity on previously unpaid assessed taxes plus assessed and accrued penalties and interest and includes dollars collected from delinquency notices, TDAs, installment agreements, deferred accounts and non-Master File accounts. Assessed tax may result from voluntarily filed returns, examination of taxpayers’ returns, or a combination of both.  Total Collection Yield from FY 2010 through FY 2013 is from the IRS Data Book Table 16. The IRS provided the FY 2014 data in advance of the publication of the FY 2014 Data Book.
  12. Bureau of Labor Standards Consumer Price Index Inflation Calculator, available at:http://www.bls.gov/data/inflation_calculator.htm.
  13. We compute dollars available for collection as the TDA dollars in inventory at the end of the prior fiscal year plus the new TDAs received for collection during the current fiscal year, plus the dollars of accounts in installment agreement inventory for both ACS and revenue officers. However, the dollar amounts of delinquencies closed to installment agreements by ACS and revenue officers during the current fiscal year were removed to prevent double counting of these delinquency amounts.

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IRS Offer in Compromise is ready for you!

Since 2012 the IRS has been much more willing to compromise with taxpayers with overwhelming tax debt than in the prior decade. IRC §7122 permits the IRS to accept offers in compromise in settlement of tax obligations for less than the full outstanding tax liabilities. The willingness of the IRS to exercise this authority has ebbed and flowed through the years. In 2012 as part of its Fresh Start initiatives, the IRS greatly liberalized the standards that it uses for acceptable offers. The statistics for the most recent fiscal years are:

Offers in compromise : 2012 2013 2014
Number of offers received 64,000 74,000 68,000
Number of offers accepted 14,000 17,000 20,000
% accepted 22% 23% 29%

The 2010 Taxpayer Advocate’s report to Congress illustrates the ebbs and flow of the offer environment during the first decade of this century. The acceptance rate went up and down but never reached a 30% acceptance rates and for of the decade was in the 15% to 24% range.

In general, an offer in compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s “reasonable collection potential.” OICs are subject to acceptance on legal requirements. To determine the taxpayer’s ability to pay, the IRS determines a value of the taxpayer’s assets and adds the value of his ability to pay in the future. The combined value of those two components is known as “Reasonable Collection Potential”(RCP).
The 2012 Fresh Start changes that caused the upward movement in the number of accepted offers included:

Revising the calculation for the taxpayer’s future income
Allowing taxpayers to repay their student loans as part of her budget
Allowing taxpayers to pay state and local delinquent taxes as part of her budget

But something to keep in mind is that without proper guidance and knowledge of the tax code, doing it alone could result in you being one of the many 70% that get denied. If you say or provide documentation the wrong way, this is irreversible and filing any subsequent filings can be impossible. let the pros handle this process for you. Our acceptance rate is over 70%. Let a tax technician speak to you regarding your personal tax situation and evaluate the best outcome for you.

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Why is there a need for a Taxpayer Bill of Rights anyway?

Last year, in a nationwide survey of U.S. taxpayers who had filed a 2010 tax return, the Taxpayer Advocate Service asked whether respondents believed they had rights before the IRS. W e also asked if they knew what their rights as a taxpayer were when dealing with the IRS. Astonishingly (to me, at least), only 55% of respondents said they believed they had rights before the IRS. Nine percent said they believed they had no rights and another 21% said they weren’t sure. (Fifteen percent didn’t answer the question.)

As the chart below indicates, as incomes rise, so does taxpayers’ belief that they have no rights before the IRS and their ignorance of those rights. On the other hand, taxpayers at the lowest income levels (under $25,000 annually) are the least likely to believe they have rights before the IRS (41%) or know what those rights are (10%).

As a taxpayer, do you believe you have rights before the IRS?

Do you know what your rights are as a taxpayer when dealing with the IRS?

Source: Forrester research survey of taxpayers nationwide, 2011.

Even worse, only 13% of taxpayers say they know what their rights are. These beliefs don’t bode well for a tax system that is based on voluntary compliance. Yes, I know every time I say this, someone says it isn’t voluntary – we are required to file and pay taxes and the IRS can do terrible things to us if we don’t. Okay, maybe that is true, but my point here is that taxpayers actually abide by the laws. They don’t have to, but they do. They consent to abide by laws that require them to pay over their money to the government.

Why do they do that? Partly, of course, out of fear that if they didn’t comply, they would get caught and face some sort of punishment. That’s what we call the classic economic model of compliance – that compliance depends upon the risk (or perception of risk) of being caught and the cost (punishment) if caught.

But this model doesn’t really explain our high compliance rate in the tax system. Even accounting for people’s inflated fears about being “caught” by the IRS, U.S. taxpayers are generally very compliant. Something else is at work here. Some commentators have called this factor “tax morale” — a combination of how taxpayers view themselves, how they want to behave in the world, how they want the world to perceive them, and how they feel about their government. (For an introduction to the concept of tax morale, see “Normative and Cognitive Aspects of Tax Compliance: Literature Review and Recommendations for the IRS Regarding Individual Taxpayers.”)

I personally believe that part of the reason taxpayers comply is because at some level they believe in a “greater good,” even if their definition of that term may differ from their neighbor’s. There is some evidence of this in the IRS Oversight Board’s recurring survey of taxpayer attitudes. When taxpayers are asked why they comply with the tax laws, 79% say they are greatly influenced by their sense of personal integrity, as compared to 34% who say they are greatly influenced by their fear of an audit.

Factors Influencing Whether You Report and Pay Your Taxes Honestly

Source: IRS Oversight Board, 2011 Taxpayer Attitude Survey.

At any rate, in general, U.S. taxpayers willingly meet their obligation to come in and tell their government about their filing status and family structure, their earnings and investments, and their expenses and losses. This places a heavy responsibility on the IRS to treat these taxpayers well – in ways that comport with our concepts of procedural justice. Failure to do so reduces our tax system to one based on compulsion alone. Hence, taxpayer rights are an essential and necessary component of our voluntary tax system.

Since 2007, I have advocated for Congress to enact a formal Taxpayer Bill of Rights (TBOR). (In this report, we discuss how other countries and states have addressed this issue.) Sure, over the years, we’ve had three pieces of legislation called TBORs, but as our survey shows, taxpayers overwhelmingly do not believe they have rights. As a result of legislation, we have taxpayer rights, but no one knows what they are. And if taxpayers don’t know what their rights are, how can they claim them?

So, in last year’s Annual Report to Congress, I again proposed that Congress pass a TBOR. At the end of this posting, I list my suggestion for the Taxpayer Bill of Rights. I’ve also added a list of taxpayer obligations, because it is always a good idea to remind folks about the social contract between a government and its citizenry – that rights imply responsibilities.

I’m not suggesting that a Taxpayer Bill of Rights, in and of itself, creates any new rights. As I noted above, we’ve had three major pieces of taxpayer rights legislation that enacted significant taxpayer protections.

Rather, I believe Congress can help taxpayers better understand their existing rights by grouping taxpayer rights into simple, easy-to-understand categories. I am recommending ten broad categories to emulate the Bill of Rights to the U.S. Constitution, because I think that will be easier for taxpayers to learn, appreciate, understand, and remember. If taxpayers understand they have rights before the IRS and what those rights are, they can avail themselves of those rights when they need them. And so the taxpayers feel like they are actually being respected for voluntarily complying with the tax laws.

And who wouldn’t want that? TAXPAYER BILL OF RIGHTS Taxpayer Rights:

  1. The right to be informed.
  2. The right to be assisted.
  3. The right to be heard.
  4. The right to pay the correct amount of tax due.
  5. The right to an appeal (administrative and judicial).
  6. The right to certainty.
  7. The right to privacy (to be free from unreasonable searches and seizures).
  8. The right to confidentiality.
  9. The right to representation.
  10. The right to a fair and just tax system.

Taxpayer Obligations:

  1. The obligation to be honest.
  2. The obligation to be cooperative.
  3. The obligation to provide accurate information and documents on time.
  4. The obligation to keep records.
  5. The obligation to pay taxes on time.

For more detail on these categories and which rights fit within each category, see Enact the Recommendations of the National Taxpayer Advocate to Protect Taxpayer Rightsfrom our 2011 report. See also Appendix 1, Partial Analysis of Subordinate Rights and Obligations.

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Examples of Non-filer Investigations – Fiscal Year 2015

This is an exceprt taken directly from the IRS website. If you think that the IRS is lax on their enforcement, think again. This is a small sample of the examples they make of people. Please do not be the next taxpayer to be on this list. We are here to help. Let us fix your tax problems and protect your assets and future earnings and avoid excessive fees and penalties.

The following examples of Non-filer Investigations are written from public record documents on file in the courts within the judicial district where the cases were prosecuted.

Massachusetts Dentist Sentenced for Tax Evasion
On June 26, 2015, in Worcester, Massachusetts, George Fenzell, of Douglas, was sentenced to 16 months in prison, one year of supervised release and ordered to pay $157,407 in restitution to the IRS. In November 2014, Fenzell pleaded guilty to tax evasion. Fenzell operated a dental office in Shrewsbury, Massachusetts and from 1999 through 2012, Fenzell engaged in conduct intended to obstruct the IRS. For the years 1999 through 2007, he failed to file timely federal income tax returns and concealed income that he earned from his dental practice from the IRS. Additionally, Fenzell failed to file his tax returns for 2008 through 2011. He concealed his dental business receipts by diverting the funds through nominee entities, including River Valley Dental. He used multiple nominee bank accounts to conceal his ownership of his income and assets. Fenzell also titled and registered a Lincoln Navigator and Ducati motorcycle with another nominee entity, Smiling Trust, and made extensive use of cash in order to conceal his fraud from the IRS.

Texan Sentenced for Failing to File Federal Income Tax Returns
On June 16, 2015, in Dallas, Texas, Anthony Rolfe was sentenced to 22 months in prison, one year of supervised release and ordered to pay $100,490 in restitution to the IRS. Rolfe pleaded guilty in March 2015 to an Information charging him failure to file income tax returns. Rolfe was employed by Dr. LeeRoy McCurley at a pain management clinic in Dallas, known as Mid-City Medical Clinic. As part of his job, Rolfe picked up the clinic’s earnings and delivered them to McCurley, in person or through McCurley’s office in Grand Prairie, Texas. Rolfe also delivered office supplies to and distributed fliers for the clinic. For these tasks McCurley paid Rolfe thousands of dollars per week in checks that Rolfe deposited into a bank account in the name of Platinum A&C Group, LLC, an entity for which Rolfe was a managing partner. Bank records showed that Rolfe deposited more than $500,000 in payments from McCurley in 2010 and 2011 and used the majority of the money on clothing and jewelry, hotel and resort stays, nightclub tabs, and yacht rentals.

Members of Sovereign Citizen Movement Sentenced for Scheme to Defraud the IRS
On June 18, 2015, in Phoenix, Arizona, Gordon Leroy Hall, of Mesa, Arizona, was sentenced to 96 months in prison. Gordon Hall’s business partner, Brandon Adams, of Albuquerque, New Mexico, was sentenced to 40 months in prison. Gordon Hall’s son, Benton Hall, was sentenced to 27 months in prison. Gordon Hall partnered with Adams after they met at various seminars associated with the sovereign citizen movement. They devised a plan to create fictitious money orders to submit to the IRS in an attempt to eliminate Hall’s and Hall’s clients’ tax debts. The scheme operated out of Hall’s office and home in Mesa, Arizona, where Hall’s children, including Benton Hall, acted as office managers. Adams created all of the fictitious money orders based on information provided by Hall’s staff. In all, Hall and Adams created and caused the submission to the IRS of 149 fictitious money orders totaling approximately $93 million.

Owner of Scrap Metal Business Sentenced for Tax Evasion
On June 16, 2015, in Kansas City, Missouri, Nellie Brown Boxx, of Kearney, Missouri, was sentenced to 18 months in prison without parole, and ordered to pay $366,846 in restitution to the IRS and the Missouri Department of Revenue. Boxx, the owner of Frank Metal Company in Kansas City, pleaded guilty on Feb. 19, 2015 to tax evasion. Boxx assisted tax preparers to prepare tax returns that contained false information. For example, Boxx classified purchases such as food items, drinks, jewelry, dry cleaning, household items and high-end clothing as business expenses for her scrap metal company. Boxx received $320,345 in taxable income in 2008, and owed $87,123 in federal income tax. In addition, Boxx submitted a false 2008 Form 1040 to a bank in order to receive a financial loan and admitted that she made false statements to IRS agents, such as falsely claiming that business documents had been destroyed by water damage from a leak in the roof.

Washington Man Sentenced for Evading Taxes on Money Stolen from Investors
On June 10, 2015, in Spokane, Washington, Michael Peter Spitzauer, of Kennewick, Washington, was sentenced to 48 months in prison, one year of supervised release and ordered to pay $10,365,000 in restitution to the victims of his fraud scheme and $2,585,177 in restitution to the IRS. Spitzauer previously pleaded guilty to filing a false tax return and failing to file a tax return. Spitzauer served as the CEO and President of Green Power, Inc., a biodiesel fuel business, which Spitzauer asserted possessed the technology to turn waste into biofuel. Spitzauer defrauded various investors by representing that he would maintain their investment deposits in accounts controlled by an attorney, and not be utilized without the parties’ written agreement. In fact, Spitzauer controlled the bank accounts, and spent the investors’ deposits in unauthorized ways, such as on luxury goods, and repaying prior investors who sought return of their funds. Spitzauer also defrauded additional investors by falsely representing that their funds would be used to pay state agency fees or insurance bonds. From 2007 to 2013, Spitzauer stole more than $10.3 million from the various victims, who reside across the globe, including in China, Spain, the Netherlands, Ireland, Australia, Slovenia, Canada, Texas, and Maryland. In addition, Spitzauer filed false tax returns for tax years 2007 and 2009, when he reported that he received no income and failed to disclose the funds he fraudulently obtained from his investors, which totaled approximately $4.5 million in taxable income for 2007 and 2009. For tax year 2008, Spitzauer failed to file a tax return, despite receiving approximately $3.2 million in taxable income, which represented funds he stole from the defrauded investors. As a result, Spitzauer evaded the assessment of approximately $2.5 million in taxes.

Arizona Businessman Sentenced for Credit Card Processing Fraud and Tax Evasion
On June 9, 2015, in Phoenix, Arizona, Sean Clinton Mecham, of Mesa, was sentenced to 33 months in prison, three years of supervised release and ordered to pay $85,000 in restitution to victims of a credit card processing fraud scheme as well as $757,000 in restitution to the Internal Revenue Service. Mecham previously pleaded guilty to conspiracy to commit wire fraud and willful failure to collect or pay over taxes. Several of Mecham’s family members, as well as one of Mecham’s employees, also previously pleaded guilty to related charges. Mecham served as the CEO of a Mesa-based company that provided credit card processing services. Mecham, and others acting at his direction, intentionally concealed or misrepresented the lease terms for credit card pin-pad machines that were sold to customers. Mecham also directed employees to forge customer signatures on lease contracts and to alter documents. Mecham and his wife also engaged in a separate scheme to withhold and misappropriate employee payroll taxes that should have been remitted to the IRS. Mecham used employee withholdings to sustain a lavish lifestyle which included the purchase of a Maserati, expensive off-road racing vehicles, travel and other expensive personal items.

Minnesota Business Executive Sentenced on Charges of Conspiracy, Tax Evasion and Failure to File Tax Returns
On May 27, 2015, in Minneapolis, Minnesota, Michael Andrew Schlegel was sentenced to 60 months in prison and three years of supervised release. Schlegel was convicted on March 13, 2014, following a seven-day trial, of conspiracy to defraud the United States, tax evasion, and failure to file tax returns. From 2002 to 2009, Schlegel controlled NatureRich, Inc., a multi-level marketing company that sold natural and health-related products. Like similar companies, NatureRich paid commissions to salespeople based on direct sales and on the sales of downstream salespeople. At various times between 2002 and 2009, Schlegel and co-defendant Bradley Mark Collin received wages and commission payments from NatureRich that totaled more than $400,000. Schlegel caused NatureRich to pay his commissions to a nominee trust called the “Andrew James Living Trust,” from which he then paid his family’s expenses. During that time, Schlegel also operated a painting business, receiving more than $400,000 in income from painting contracts. In 2004, the defendants, through the use of nominee entities, began engaging the “warehouse” banking services of Olympic Business Systems and Century Business Concepts. The defendants also filed misleading federal corporate tax returns in the name of NatureRich in an effort to conceal the true extent of their personal interest in, and the income derived, from NatureRich. In all, the defendants attempted to conceal at least $3 million in gross income from the IRS, thereby avoiding income taxes on that amount and also avoiding having those funds seized for payment of their previous tax debts. From 2002 through 2010, Schlegel and Collin conspired with each other and others to defraud the U.S. by obstructing the IRS in its lawful collection and assessment of individual income taxes. Schlegel failed to make any payments toward the back taxes, interest and penalties levied against him in 2000, which totaled more than $600,000. Schlegel also failed to file federal individual tax returns for tax years 2002-2009. On Nov. 4, 2014, Bradley Mark Collin was sentenced to 24 months in prison and three years of supervised release.

Utah Man Sentenced for Filing False Claims and Presenting Fictitious Financial Instruments to the U.S. Government
On May 26, 2015, in Salt Lake City, Utah, Paul Ben Zaccardi, of Sandy, Utah, was sentenced to 24 months in prison, four years of supervised release and ordered to pay restitution to the IRS. On Oct. 29, 2014, Zaccardi pleaded guilty to tax evasion filing false claims for income tax refunds and filing fictitious obligations. In April 2004, Zaccardi embarked on a scheme to evade the payment of his federal income taxes. As part of that scheme and to avoid federal tax levies, Zaccardi transferred title to his residence to a nominee entity that he formed called Saved by Grace Christian Fellowship and caused his business receipts to be deposited into his wife’s bank account. Zaccardi also presented five separate false tax returns to the IRS falsely claiming tax refunds totaling more than $1.5 million. In addition, from June 2008 to October 2011, Zaccardi presented three separate fictitious financial instruments to the IRS, U.S. Department of the Treasury and the U.S. District Court of the District of Utah for a combined total of $605 million, to purportedly pay his federal income tax liabilities.

Wisconsin Man Sentenced for Filing Hundreds of False Documents with IRS
On May 12, 2015, in Madison, Wisconsin, Scott Bodley, formerly of Madison, was sentenced to 78 months in prison. Bodley was convicted on Feb. 6, 2015 for filing false money orders with the IRS, filing false 1099-OID documents, filing false tax returns, income tax evasion, and endeavoring to impede and obstruct the due administration of the Internal Revenue laws. Bodley stopped filing legitimate tax returns in 1999. In 2003, he threatened to file liens on an IRS agent who was auditing his 1999-2001 taxes. From 2004 to 2009, Bodley filed false W-4 documents with his employers in an effort to avoid the withholding of taxes from his paychecks. In 2004, he quit his job in an effort to stop an IRS levy on his wages. In 2008, Bodley filed in excess of 100 false forms with the IRS in an attempt to harass and impede IRS agents in the performance of their duties.

Oklahoma Couple Sentenced for Ponzi Scheme Related to Fictitious Hedge Fund
On April 21, 2015, in Las Vegas, Nevada, Linda Livolsi (aka Linda G. Findley, aka Linda Grogg) of Cleveland, Oklahoma, was sentenced to 45 months in prison, three years of supervised release and ordered to pay approximately $6.1 million in restitution. She pleaded guilty on Oct. 15, 2014, to wire fraud and making and filing a false and fraudulent tax return. Her husband, William Livolsi Jr., was sentenced to 24 months in prison, three years of supervised release and ordered to pay approximately $5 million in restitution. He pleaded guilty on Oct. 15, 2014 to wire fraud. Since about 2003, under the artifice of RGM Enterprises, LLC, Linda Livolsi solicited and induced persons to give her money for the purpose of investing in a purported hedge fund that offered large monetary returns. In reality, the hedge fund never existed and the Livolsi’s spent most the money for their personal benefit. William Livolsi participated in the fraud scheme by vouching to victims about the scheme, by creating a trust and bank accounts into which he received and withdrew monies deposited by victims, and by using the fraud monies for his own personal benefit. Victims were provided with false and fraudulent financial statements and account statements. The Livolsi’s fraudulently obtained about $6.5 million in funds from six investors from 2003 to 2007. Linda Livolsi also filed false federal tax returns for the years 2003 through 2006, and failed to file tax returns for 2007 and 2008. Her total tax liability for those years, not including interest and penalties, is approximately $1.1 million.

Former Prison Doctor Sentenced for Defrauding the IRS and Financial Aid System
On April 20, 2015, in Philadelphia, Pennsylvania, Dennis Erik Fluck Von Kiel, of New Tripoli, Pennsylvania, was sentenced to 41 months in prison, three years of supervised release, ordered to forfeit $165,988 and pay a $1,325 special assessment. In addition, Von Kiel was ordered to pay $256,920 in restitution to the IRS, to pay $262,303 to the Department of Health and Human Services (DHHS) and to pay $36,314 to the Department of Education. Von Kiel pleaded guilty on Jan. 12, 2015 to conspiracy to defraud the United States, attempting to defeat or evade a federal tax, attempting to obstruct the due administration of the Internal Revenue code, failure to file tax returns, wire fraud and aiding and abetting wire fraud, perjury in a bankruptcy proceeding, financial aid fraud and aiding and abetting financial aid fraud, mail fraud and attempted mail fraud. Since 2001, Von Kiel, the former medical director of Lehigh County Prison, engaged in a series of illegal schemes that were designed to help him evade creditors, including the DHHS to whom Von Kiel owed hundreds of thousands of dollars in outstanding medical school loans. He tried to defraud the IRS in order to avoid paying more than $200,000 in personal income taxes. Von Kiel also lied on applications to the Department of Education for financial student aid for four of his children, which enabled them to receive more than $36,000 in federal Pell Grants for their college educations. Von Kiel also intentional made a false statement under oath in a bankruptcy. Most of Von Kiel’s schemes involved him pretending to become a minister of a “church” called the International Academy of Lymphology (which later changed its name to the International Academy of Life and then the Christian Forum Assembly), purporting to take a “vow of poverty,” and then claiming that he had no taxable income because his earnings belonged to the “church.” Von Kiel convinced his employer that he was exempt from federal tax withholdings and directed his employer to deposit his bi-weekly paychecks into bank accounts for his “church.” Once the money arrived in those accounts, co-conspirators would transfer nearly the same amount of money into Pennsylvania bank accounts controlled by Von Kiel. Von Kiel then used the money to pay for all of his family’s day-to-day living expenses and to buy some luxury items.

Florida Man Sentenced For False Tax Claims and Obstructing the Internal Revenue Service
On April 20, 2015, in Fort Myers, Florida, Ronald Francis Croteau was sentenced to 56 months in prison. A federal jury convicted Croteau on Jan. 22, 2015 for filing false tax claims and for obstructing or impeding the administration of the Internal Revenue laws. Croteau belonged to a sovereign citizen, anti-government group; claimed to be a member of the Little Shell Pembina Band of North Dakota and deemed himself to be an ambassador of the Kingdom of Heaven. Between September 2008 and May 2010, he filed 10 false and fraudulent income tax returns claiming refunds totaling more than $3.8 million. These returns claimed federal tax withholdings from fraudulent Forms 1099-OID purportedly issued to Croteau by financial institutions. After being notified by the IRS that his income tax returns were frivolous, Croteau continued to file fraudulent income tax returns. In addition, he obstructed the administration of the Internal Revenue laws by filing false liens against IRS employees, submitting fraudulent instruments to the IRS in an attempt to discharge his tax liabilities and recording false documents with the Lee County Clerk of Court.

Virginia Attorney Sentenced for Tax Fraud
On April 1, 2015, in Alexandria, Virginia, William M. Weisberg, an attorney from Vienna, Virginia, was sentenced to 12 months and one day in prison, three years of supervised release and ordered to pay $451,955 in restitution to the Internal Revenue Service. Weisberg pleaded guilty on Dec. 13, 2014, to willful failure to pay personal income taxes. From 2008 through 2010, Weisberg was a practicing attorney who filed his tax returns for those years, but failed to pay his taxes for 2008 and 2010 and paid only a portion of his taxes for 2009. During that same period, however, he paid approximately $250,000 to rent a house in Vienna, $150,000 for private and parochial schools for his children, $35,000 for maid service and $130,000 for travel and entertainment. In addition, when the IRS tried to work with Weisberg in 2010 to obtain the money he owed, Weisberg falsified a document from his law firm, which told the IRS that the firm was withholding money from his paychecks to give to the IRS when, in fact, no money was being withheld.

North Carolina Tax Preparer Sentenced for Tax Evasion and Filing False Tax Returns
On March 25, 2015, in Charlotte, North Carolina, Jessica Ordonez, of Belmont, was sentenced to 24 months in prison, one year under court supervision and ordered to pay $288,302 in restitution. Ordonez pleaded guilty in April 2014 to tax evasion and aiding and assisting in the preparation and presentation of a false tax return. Ordonez was the owner of Tax Pros (a/k/a “Ordonez Tax Services”), which provided tax preparation and other services and had offices in Gastonia and Morganton, North Carolina. Between 2004 and 2012, Ordonez prepared at least 100 false tax returns for 23 taxpayers, using fraudulent Individual Taxpayer Identification Numbers. Ordonez used false Additional Child Tax Credit and other false information to prepare the fraudulent returns, which entitled her clients to large fraudulent tax refunds. The tax loss associated with the fraudulent returns was approximately $202,217. In addition to filing the false returns, court records indicate that Ordonez failed to report her own income on her individual tax returns for tax years 2009 to 2011, with a corresponding tax loss of $86,085.

North Carolina Woman Sentenced for Embezzlement and Filing a False Tax Return
On March 24, 2015, Charlotte, North Carolina, Tara Gist-Savage, of Shelby, North Carolina, was sentenced to 60 months in prison, five years of supervised release and ordered to pay $512,586 in restitution. Gist-Savage pleaded guilty in September 2014 to wire fraud and filing a false tax return. From 2008 to 2013, Gist-Savage was employed by an energy services company based in Belmont, North Carolina, and was responsible for the energy company’s payroll, as well as the payroll of an affiliated company. Gist-Savage accessed the personal information of the two companies’ former and inactive employees and used it to generate fraudulent payroll checks in the names of at least 49 individuals. Gist-Savage provided the fraudulent information to various payroll businesses used by the companies to generate payroll payments, and directed the fraudulent payroll checks to be wired to four different bank accounts held in her name. Gist-Savage embezzled $410,936. In addition, for years 2008 through 2012, Gist-Savage failed to report the fraudulently obtained income on her U.S. Individual Income Tax Returns. The estimated tax due and owing relative to the unreported income was approximately $101,650.

Former Bechtel Executive Sentenced in Connection with Kickback Scheme
On March 23, 2015, in Greenbelt, Maryland, Asem Elgawhary, of Potomac, Maryland, was sentenced to 42 months in prison and ordered to forfeit $5.2 million. Elgawhary, the former principal vice president of Bechtel Corporation and general manager of a joint venture operated by Bechtel and an Egyptian utility company, pleaded guilty on Dec. 4, 2014, to mail fraud, conspiracy to commit money laundering, obstruction and interference with the administration of the tax laws. From 1996 to 2011, Elgawhary was assigned by Bechtel as the general manager at Power Generation Engineering and Services Company (PGESCo), a joint venture between Bechtel and Egypt’s state-owned and state-controlled electricity company, known as EEHC. PGESCo assisted EEHC in identifying possible subcontractors, soliciting bids and awarding contracts to perform power projects for EEHC. Elgawhary accepted a total of $5.2 million from three power companies that paid to secure a competitive and unfair advantage in the bidding process. One of the power companies, Alstom S.A., pleaded guilty on Dec. 22, 2014, to violations of the Foreign Corrupt Practices Act (FCPA) in connection with a scheme to pay bribes to foreign officials, including Elgawhary, in various countries. Elgawhary attempted to conceal the kickback scheme by routing the payments through various off-shore bank accounts under his control. In addition, Elgawhary obstructed and interfered with tax laws by failing to report any of the kickback payments as income for the tax years 2008 through 2011 and providing false information about foreign bank accounts.

Owner of Landscaping Business Sentenced for Diverting Over $2 Million of Business Receipts
On March 12, 2015, in Camden, New Jersey, Nicholas Lepore, of Deptford, was sentenced to 12 months and one day in prison and two years of supervised release. Lepore previously pleaded guilty to tax evasion. Lepore owned and operated Down to Earth Landscaping and Irrigation, Inc. (Down to Earth), which provided landscaping and irrigation services to commercial and residential customers. Down to Earth was a subchapter S corporation and as the owner, Lepore was required to report the flow through income and losses from Down to Earth on his personal tax returns. Lepore routinely cashed customer checks at local check cashing businesses to disguise the amount of income received by Down to Earth. Customer checks totaling $2,148,862 were deposited in years 2007 through 2010. Additionally, Lepore failed to file tax returns for the years 2007 through 2010 and thus, did not include any of the customer checks as income.

Florida Man Sentenced for False Tax Claims and Obstructing the IRS
On March 3, 2015, in Fort Myers, Florida, Armand J. Croteau, of Punta Gorda, Florida, was sentenced to 27 months in prison. Croteau pleaded guilty on July 2, 2014 to filing false claims with the IRS and corruptly obstructing or impeding the administration of the Internal Revenue laws. Croteau filed numerous false claims for tax years 2005 through 2009, seeking refunds totaling $1,918,118. He used the 1099-OID (Original Issue Discount) anti-tax scheme to present fraudulent Forms 1040 and 1040X to the IRS, reporting excess withholding that was fabricated by him. He also made false reports on Forms 1099-OID and on the tax returns. After being notified by the IRS that his income tax returns were frivolous, Croteau continued to file fraudulent income tax returns. In order to obstruct or impede the administration of the Internal Revenue laws, he filed false liens against IRS personnel, recorded false documents with the Charlotte County Clerk of Courts, and submitted fraudulent instruments to the Department of the Treasury in an attempt to discharge his tax liabilities.

Real Estate Agent Sentenced for Money Laundering and Tax Offenses
On March 2, 2015, in Phoenix, Arizona, Tanya Marchiol, of Phoenix, was sentenced to 48 months in prison. Marchiol previously pleaded guilty to willfully failing to file a tax return and was convicted by a jury in November 2014 of structuring financial transactions and money laundering. Marchiol, a former real estate agent and the author of a book on tax and financial advice entitled “The Prosperity Principles,” did not file tax returns in 2007, 2008, or 2009. Furthermore, after learning the IRS was planning to seize her bank accounts for unpaid taxes, Marchiol made a series of illegal withdrawals and then attempted to hide the money in a safe in her house. In addition, Marchiol attempted to help a pair of drug dealers buy a house with money they had earned from selling marijuana. Marchiol sought to conceal the drug dealers’ interest in the house by accepting a lump-sum delivery of $140,000 in cash from them, depositing the cash into her bank account, and using the cash to buy the house in her company’s name with the intent of later transferring the house’s title to them.

Business Operator Sentenced for Fraudulent Tax Refund Scheme
On Feb. 27, 2015, in San Francisco, California, Mark R. Maness, of Spartanburg, South Carolina, was sentenced to 41 months in prison and ordered to pay $1,176,668 in restitution to the IRS. On Nov. 18, 2014, Maness pleaded guilty to conspiracy to submit false claims. Maness and a partner operated a business named O.I.D. Process. Through the business, Maness and his partner aided and assisted in the preparation and filing of fraudulent U.S. Individual Income Tax Returns. Maness claimed fraudulent Original Issue Discount interest income and federal tax withholdings, resulting in claims for fraudulent federal income tax refunds. O.I.D. Process clients filed approximately 200 returns requesting fraudulent refunds totaling approximately $228 million. Maness and his partner charged clients a non-refundable registration fee to join the organization and a 20 percent “refund acquisition fee” for any refund check issued by the IRS. They also operated a website and conducted weekly conference calls with clients to offer advice and guidance on how to complete fraudulent tax returns. Clients were required to change their mailing addresses with the IRS to the address of an attorney in San Francisco, California, who was working with Maness and his partner, so that they could ensure receipt of their 20 percent refund acquisition fee.

Nebraska Woman Sentenced for Obstructing IRS and Filing False Property Liens Against Federal Officials
On Feb. 20, 2015, in Omaha, Nebraska, Donna Marie Kozak, of La Vista, Nebraska, was sentenced to 36 months in prison and three years of supervised release. Kozak, a former college instructor, was convicted by jury on Aug. 1, 2014, on charges related to tax obstruction, filing a false claim and filing false retaliatory property liens. Kozak stopped filing income tax returns in 1997, and from 1997 through 2012, she obstructed the IRS by hiding assets, applying for tax-exempt status for a sham entity, filing a false claim for a tax refund, sending harassing correspondence to IRS agents and filing false liens against an IRS-Criminal Investigation special agent and others. In about 2009, Kozak joined the “Republic for the united States of America,” a sovereign citizen group, and was the group’s designated “governor of Nebraska.” In 2012 and 2013, Kozak and Randall Due conspired to file false liens in retaliation for the federal criminal tax prosecution and trial convictions of associates David and Bernita Kleensang. To futher the conspiracy, Kozak and Due filed a false lien for $19 million on property located in Boyd County, Nebraska, that was owned by the federal U.S. District Court judge who presided over the Kleensang trial. After Kozak was indicted by a federal grand jury for the criminal tax charges, and while on pre-trial release, she filed five more false liens on properties owned by another federal U.S. District Court judge, the U.S. Attorney for the District of Nebraska, two Assistant U.S. Attorneys and an IRS-Criminal Investigation special agent. Due was convicted on Sept. 4, 2014 on related charges.

Colorado Residents Sentenced for Conspiracy to Defraud the IRS and Related Tax Charges
On Feb. 10, 2015, in Denver, Colorado, George Brokaw, John Pawelski and Mimi Vigil, all from Colorado Springs, Colorado, were sentenced for conspiracy to defraud the IRS and related tax charges. Brokaw and Pawelski were each sentenced to 78 months in prison, three years of supervised release and ordered to pay a $15,000 fine. Vigil was sentenced to 72 months in prison and three years of supervised. Beginning in October 2008 and continuing through May 2009, Brokaw, Pawelski, Vigil and others conspired with each other to defraud the United States by submitting false claims for income tax refunds to the IRS. The three filed, or caused to be filed, false, fictitious and fraudulent Form 1040 tax returns containing false claims for refunds in their names. A total of 12 fraudulent returns were filed attempting to receive more than $24 million dollars in fraudulent refunds. In connection with these false tax returns, they submitted or caused to be submitted, false Forms 1099-OID. The 1099-OID forms falsely reported that financial institutions, lenders or other entities had withheld and paid over to the IRS interest income from accounts which did not generate such interest income and from which no such withholdings were made. The Form 1040 tax returns claimed false refunds based on these false claims of withholdings. Furthermore, from March 2008 and continuing through April 2012, the defendants willfully conspired with each other to obstruct and impede the due administration of the Internal Revenue laws by attempting to thwart the legitimate collection of taxes owed to the IRS by them and others. They caused to be filed, or submitted to the IRS, a variety of false, fraudulent or illegitimate documents which purported to constitute payments of taxes owed to the IRS as well as purported electronic funds transfer drawn on closed bank accounts. In addition, the defendants filed a variety of false and fraudulent liens or other documents that falsely claimed IRS employees, who were engaged in legitimate tax collection efforts against one or more of the defendants, owed one or more of the defendants amounts of money ranging from tens of millions of dollars to billions of dollars.

Investment Advisor Sentenced for Tax Evasion
On Feb. 6, 2015, in Minneapolis, Minnesota, Joel William Carlson, of Vadnais Heights, Minnesota, was sentenced to 42 months in prison and ordered to pay approximately $1.9 million in restitution to the investment fraud victims and his father and approximately $1.2 million in restitution to the IRS. Carlson pleaded guilty on Sept. 10, 2014, to tax evasion. Carlson acted as an investment advisor during 2010 and 2011. He deposited client investments, as well as additional funds solicited from his father, into a Trust Financial Group account, which Carlson treated as his personal bank account. Instead of investing the funds, Carlson spent the money on personal items and, when confronted, lied to his clients about the existence of their investments. In addition to intentionally misappropriating both client assets and his father’s assets, totaling more than $1.5 million, Carlson failed to file personal income tax returns for tax years 2010 and 2011. Carlson also failed to timely file personal income tax returns for tax years 2005 through 2007. As a result, the IRS filed a federal tax lien against Carlson for approximately $495,000.

Physician Sentenced for Failing to File Tax Returns, Owes $1.5 Million
On Feb. 3, 2015, in Springfield, Missouri, Phillip Edward Psaltis, of Kimberling City, was sentenced to 24 months in prison and ordered to pay $1,581,594 in restitution to the IRS, the Missouri Department of Revenue and the Oklahoma Department of Revenue. On Oct. 9, 2014, Psaltis pleaded guilty to failing to file an income tax return. Psaltis, an emergency room physician, failed to file federal income tax returns since 2002. The two specific charges to which Psaltis pleaded guilty relate to his failure to file a federal tax return for 2009, when he earned approximately $450,664, and for 2010, when he earned approximately $433,339. Psaltis also failed to file federal income tax returns for 2009, 2010 and 2011. His unreported income during those years totaled $1,204,786 and the total tax loss was $377,022. Psaltis also owes $551,434 in outstanding federal taxes for the years 2002 through 2008. Because Psaltis did not file his 2012 tax return, it is estimated that he will owe approximately $128,109 in tax liability for 2012.

Lawyer Sentenced for Failing to File Tax Returns
On Jan. 14, 2015, in Las Vegas, Nevada, Lawrence J. Semenza II, was sentenced to 18 months in prison, one year of supervised release and ordered to pay approximately $290,000 in restitution to the IRS. Semenza, a lawyer who served as the U.S. Attorney for Nevada during the 1970’s, pleaded guilty in August 2014 to willful failure to file a tax return. Semenza operated his law practice in Las Vegas as a subchapter C personal service corporation. For the years 2006 through 2010, Semenza individually had taxable income of approximately $655,000, and the corporation had taxable income of approximately $345,000, but Semenza failed to file individual or corporate income tax returns for those years, and failed to pay the tax due and owing to the IRS, totaling about $290,000.

Doctor and Wife Sentenced on Tax Charges
On Jan. 13, 2015, in San Diego, California, Dr. James Francis Murphy was sentenced to 48 months in prison and ordered to pay nearly half a million dollars in restitution to the IRS. His wife, Denine Christine Murphy, a co-defendant in the case, was sentenced to 12 months of house arrest and ordered to pay restitution of $147,528. Dr. Murphy operated medical practices in Encinitas, California, and Omaha, Nebraska. Despite earning as much as $1 million a year from their osteopathic medical practice, the Murphys paid almost no federal income taxes for a decade. Instead of accurately declaring their income and paying taxes lawfully owed to the United States, the Murphys filed false income tax returns for the medical practice using a bogus “trust,” and filed false personal income tax returns concealing their true income. In some years the Murphys simply refused to file required tax returns at all. When confronted by the IRS and notified that they owed substantial sums in taxes, the Murphys engaged in a variety of schemes to prevent the United States from correctly assessing and collecting these taxes. These schemes included: (1) falsely claiming that they were not citizens of the United States; (2) frivolously claiming that the federal tax laws did not apply to them; (3) fraudulently presenting fictitious documents such as “Private Offset Discharge and Indemnity Bonds” and “Bonded Promissory Notes,” purportedly worth hundreds of millions of dollars, as payment on their tax obligations; and (4) fraudulently claiming that the hundreds of thousands of dollars they paid to credit card companies, utilities, and other vendors were actually withholdings of federal income taxes, thereby entitling them to over a million dollars in refunds from the IRS.

Missouri Man Sentenced on Tax Charges
On Jan. 8, 2015, in St. Louis, Missouri, Peter Giambalvo, of Hawk Point, Missouri, was sentenced to 16 months in prison. Giambalvo was convicted in August 2014 of interfering with the administration of the Internal Revenue laws and filing false tax returns. Giambalvo was an employee of the Boeing Company and beginning in 2003 through 2010, he claimed zero earnings when, in fact, he had earned wages, salaries, tips, etc. of approximately $498,540 for those years.

Former Consultant to New York Democratic Senate Campaign Committee Sentenced for Tax and Fraud Conspiracy
On Dec. 19, 2014, in Manhattan, New York, Melvin Lowe, a former consultant to the New York State Democratic Senate Campaign Committee (DSCC), was sentenced to 36 months in prison and three years of supervised release. Lowe was convicted in September 2014 for conspiring with New York State Senator John Sampson to defraud the DSCC of $100,000, and for personal income tax offenses. According to court documents, Lowe arranged for a New Jersey-based political consultant to submit a false invoice to the DSCC for $100,000 in printing services. Sampson approved payment of the invoice and the DSCC sent $100,000 to the New Jersey-based consultant. Lowe instructed the consultant to send $75,000 of the proceeds to Lowe’s consulting company. Lowe received more than $2.1 million in consulting income from 2007 to 2012. He reported less than $25,000 in income in each of his federal income tax returns for 2007 through 2009, which he did not file until late 2010. Lowe never filed tax returns for 2010 through 2012. He never made any payments toward his taxes for the years 2000 through 2012.

Mississippi Doctor Sentenced on Tax Evasion Convictions
On Dec. 18, 2014, in Gulfport, Mississippi, Timothy Dale Jackson, of Pass Christian, was sentenced to 75 months in prison, three years of supervised release and ordered to pay a $12,500 fine and $806,982 in restitution. On Sept. 25, 2014, Jackson, an orthopedic physician, was found guilty of four counts of income tax evasion and one count of obstruction of the due administration of the Internal Revenue laws. According to court documents, Jackson used a complex tax evasion scheme involving an entity in Utah, which claimed it was a tax exempt church, to evade his taxes. He had not filed any tax returns or paid any income taxes since the year 2003.

Alaska Man Sentenced for Tax Crimes
On Dec. 16, 2014, in Anchorage, Alaska, James R. Back, of Soldotna, was sentenced to 16 months in prison, one year of supervised release and ordered to pay over $17,000 for the cost of prosecution and to pay $113,286 in back taxes. In October 2014, Back was convicted by a jury of filing false 2006, 2007 and 2008 individual income tax returns and failure to file his 2009, 2010, 2011 and 2012 returns. According to trial evidence, Back earned over $125,000 in wages during each of the prosecution years, yet falsely claimed on the 2006, 2007, and 2008 returns that his wages were zero. For the years 2009 through 2012, Back simply failed to file. Back contributed over $140,000 to a retirement plan during the prosecution years, had investment accounts worth hundreds of thousands of dollars, owned real estate and purchased over $400,000 in gold and silver bullion. Back represented himself at the trial, and argued to the jury that taxation was immoral and unfair, and that he simply refused to submit to it anymore. He argued that the Alaska Permanent Fund Dividend was not taxable, even though he applied for and received it each year. He also argued that there was no evidence that state or federal laws applied to him. Back ignored prior warnings from his employer, his supervisor, the IRS, and a United States Tax Court Judge that his arguments were frivolous.

Daycare Operator Sentenced on Income Tax Charges
On Dec. 11, 2014, in Columbus, Ohio, Lindora Elizabeth Forrest, of Pickerington, was sentenced to 12 months in prison, three years of supervised release and ordered to pay $326,553 in restitution to the IRS. On June 24, 2014, Forrest pleaded guilty to one count of committing income tax evasion and two counts of willfully failing to file an income tax return with the IRS. According to court documents, between 2009 and 2011, Forrest owned and operated Just For You Daycare II, LLC. The daycare received payments from the county and state in conjunction with Title XX Child Care supplements, totaling approximately $1,893,792. Forrest used a portion of these funds to operate the daycare, but she also used these funds as the source of substantial personal income. For the 2010 tax year, Forrest willfully attempted to evade approximately $80,606 in income tax by underreporting the gross receipts she received and overstating expenses of the daycare. In addition, for the 2009 and 2011 tax years, Forrest received $599,000 and $625,000, respectively, in gross income but she willfully failed to file an income tax return with the IRS.

Physician and Author Sentenced on Tax Evasion Charges
On Dec. 11, 2013, in Kansas City, Kansas, Mary C. Vernon, of Lawrence, was sentenced to 41 months in prison and ordered to pay more than $299,000 in restitution. Vernon, a physician and author, was convicted on five counts of tax evasion. Vernon specialized in treating obesity and co-authored a book based on the ideas promoted by the late Dr. Robert Atkins titled, “Atkins Diabetes Revolution.” She also provided medical services and served as medical director for a number of nursing homes. Most recently, she served in a contract position as the director of the emergency room for the Southwest Medical Center in Liberal, Kansas. According to trial evidence, Vernon earned approximately $588,686 for services she provided in 2003 and 2004 to Atkins Nutritionals, Inc., a company that sold weight loss programs and products. From 2005 to 2008, she earned an additional $190,000 to promote Dr. Atkins’ nutritional theories. From 1999 to 2007, the IRS attempted to collect taxes, interest and penalties that Vernon owed and failed to pay from 1991 through 2005. The IRS collected approximately $2 million in taxes, interest and penalties through levies and seizures. In 2003, Vernon hired an attorney to create a corporation called Rockledge Medical Services. However, Rockledge Medical Services was a sham corporation that Vernon used to avoid paying taxes. She evaded paying incomes taxes for the years 2004 through 2008.

Former New Jersey Chiropractor Sentenced for Tax Fraud
On Dec. 3, 2014, in Trenton, New Jersey, David Moleski, a pilot and former chiropractor, was sentenced to 54 months in prison and five of supervised release. A jury convicted Moleski in February 2014 of 14 counts of mail fraud, one count of wire fraud, one count of corruptly endeavoring to obstruct and impede Internal Revenue laws and three counts of submitting false claims for tax refunds. According to court documents, Moleski submitted three false tax returns in 2009 for tax years 2006 through 2008 that collectively requested more than $1.3 million in income tax refunds to which he was not entitled. Prior to filing these returns, Moleski failed to file tax returns from 1999 through 2005, even though he was legally required to file. When the IRS assessed taxes for those years and began collecting, Moleski obstructed the collection efforts and demanded that a third-party financial institution not comply with an IRS levy. In addition, Moleski attempted to pay credit card bills and other debts with fake financial instruments that claimed to draw on an account at the U.S. Treasury that did not actually exist.

Hawaii Woman Sentenced for Fraud and Tax Charges Related to Debt Elimination Scheme
On Dec. 1, 2014, in Honolulu, Hawaii, Mahealani Ventura-Oliver, formerly of Maui, was sentenced to 78 months in prison and ordered to pay $424,534 in restitution. In October 2013, a jury found Ventura-Oliver guilty of conspiring to use fictitious financial instruments, mail fraud, money laundering, conspiring to submit false tax returns seeking $1.5 million in refunds from the IRS and submitting one false tax return. According to court evidence, Ventura-Oliver and others were part of a group known as Ko Hawaii Pae Aina, the Registry and Hawaiiloa Foundation. Between 2008 and 2009, the group held weekly seminars where Ventura-Oliver and others spoke about Hawaiian history and culture, and royal land patents. In return for the payment of a fee, the group offered to provide distressed homeowners with “bonds” and other documents that would pay off their mortgages and forestall collection efforts. The “bonds” purportedly directed the United States Treasury Department or the State of Hawaii Comptroller of the Currency to make payments on behalf of the homeowners. Many of the individuals tried to use the bonds but ultimately lost their homes through foreclosure, or had to renegotiate loans. Hawaiiloa Foundation collected approximately $468,000 from approximately 200 individuals who went through the debt elimination process. The Hawaiiloa Foundation also promoted a tax program whereby participants supposedly could seek refunds from the IRS for debts paid off with the purported bonds.

Former Illinois Home Builder Sentenced for Failing to Pay $1.27 Million in Federal Income Taxes
On Nov. 24, 2014, in Chicago, Illinois, Dennis Weiss, of South Elgin and formerly of St. Charles, was sentenced to 30 months in prison and ordered to pay $296,643 in restitution to the IRS. Weiss previously pleaded guilty to filing a false federal income tax return and making false statements in a bankruptcy petition. According to court documents, Weiss owned Custom Homes by D. R. Weiss, Inc., and Reliable Home Solutions, Inc. Weiss filed false individual federal income tax returns for 2005 through 2009, and he failed to file corporate tax returns for both of his companies. Between 2005 and 2009, Weiss paid personal expenses from Custom’s business bank account, accepted cash payments from Custom and Reliable customers, and failed to record the receipt of these funds on the books and records of the corporations, resulting in a total federal tax loss of $1,271,280. In Weiss’ personal bankruptcy petition, he intentionally concealed the existence of a company he owned and interests in three family held entities. In addition to criminal penalties, Weiss remains responsible for all taxes and interest due, as well as civil penalties of up to 75 percent of the tax owed.

New York Attorney Sentenced in Tax Fraud Scheme With Failing To Report Over $3 Million In Fee Income
On Nov. 21, 2014, in Albany, New York, Stanley L. Cohen, a Manhattan-based attorney, was sentenced to 18 months in prison and one year of supervised release. Cohen previously pleaded guilty to obstructing and impeding the IRS and two counts of failing to file a tax return. According to court documents, Cohen took multiple steps to impede the IRS including failing to file individual and corporate income tax returns for tax years 2005 through 2010, failing to file Forms 1099 or W-2 for a law office assistant at his firm, failing to maintain books and records for his law practice and not reporting payments received and expenses paid in cash. Investigators determined that for the years 2004 through 2010, Cohen had deposits totaling $3,673,906 in his financial accounts. As part of his plea agreement, Cohen is required to pay all federal and state income taxes due and owing from the years 2005 through 2010.

Florist Shop Owner Sentenced for Dodging Taxes and Filing False Liens Against Federal Officers
On Nov. 20, 2014, in Sacramento, California, James O. Molen, of Chico, was sentenced to 36 months in prison and three years of supervised release. According to evidence presented at trial, Molen ran Touch of Class Florist in Chico, and beginning in 2000, he stopped withholding and paying federal employment and unemployment taxes. After years of collection efforts by the IRS, Molen filed false liens in 2004 against people who had been involved in his case: two federal judges, the United States Attorney, two civil Department of Justice attorneys, an IRS revenue officer, and a witness. The liens claimed collateral of more than $93 billion. After a 2007 court order prohibited him from filing more false liens against federal officers, in 2010, Molen filed false liens against two revenue officers assigned to collect his taxes, claiming more than $199,000 in collateral. Molen ignored several court orders, sent a bogus tax payment to the IRS that he called an “International Bill of Exchange,” and sought to frustrate collections by placing his residence and bank accounts in trusts.

Connecticut Resident Sentenced for Tax Evasion
On Nov. 19, 2014, in New Haven, Connecticut, Robert Joseph Parker, of Fairfield, was sentenced to 18 months in prison and three years of supervised release. Parker was also ordered to pay $1,869,419 in taxes, interest and penalties for himself personally for tax years 1996 through 2012, and for Success Zone, LLC, for tax years 2003 through 2012. On March 5, 2014, Parker pleaded guilty to one count of tax evasion. According to court documents, Parker earned income by providing information technology services to various businesses. Between 1996 and 2012, Parker did not pay any federal income tax on approximately $2 million of income he received in his own name, and in the name of his alter ego entity known as Success Zone, LLC.

Texas Businessman Sentenced for Tax Evasion
On Oct. 10, 2014, in San Antonio, Texas, Sterling Benningfield was sentenced to 41 months in prison, three years of supervised release and ordered to pay $422,301 in restitution. Benningfield pleaded guilty on July 2, 2014 to attempt to defeat or evade taxes. According to court documents, in 1998, 1999 and through June 2000, Benningfield owned, controlled and operated Federation of Associated Health Systems, Inc. (FAHS). Benningfield created a shell company, VACCO Inc., which he placed in his daughter’s name. He opened a bank account for VACCO and then directed income he received from FAHS to be deposited into this shell account. Benningfield then used the funds in the VACCO bank account to pay for his personal and living expenses. In June 2000, Benningfield sold FAHS to Carnegie International Corporation. Carnegie retained Benningfield as a consultant and, in accordance with Benningfield’s instructions, the consulting fees were paid to VACCO. Benningfield failed to notify his accountant of monies paid on his behalf from FAHS to VACCO and therefore caused his taxable income to be understated. Through this scheme, Benningfield willfully attempted to evade his personal federal income tax for the years 1998, 1999 and 2000 by $3,169, $138,003 and $282,004, respectively, by filing federal income tax returns that understated his true taxable income for those years.

“Real Housewives of New Jersey” Stars Sentenced for Conspiracy, Bankruptcy Fraud and Tax Offenses
On Oct. 2, 2014, in Newark, New Jersey, Teresa Giudice and her husband, Giuseppe “Joe” Giudice, both of Towaco, were sentenced to 15 months and 41 months in prison, respectively. Both also were sentenced to two years of supervised release and ordered to forfeit $414,588. Both previously pleaded guilty to conspiracy to commit mail and wire fraud, bankruptcy fraud by concealment of assets, bankruptcy fraud by false oaths, and bankruptcy fraud by false declarations. Giuseppe also pleaded guilty to failure to file a tax return. According to court documents, from September 2001 through September 2008, both engaged in a mail and wire fraud conspiracy in which they submitted fraudulent applications and supporting documents to lenders in order to obtain mortgages and other loans. In relation to a petition for individual bankruptcy protection, the Giudices intentionally concealed businesses they owned and income they received and provided false testimony under oath. Giuseppe admitted that during tax years 2004 through 2008, he received income totaling $996,459 but did not file tax returns for those years.

Connecticut Man Sentenced for Investment Fraud and Tax Evasion
On Oct. 1, 2014, in Hartford, Connecticut, Frank Mete, of Berlin, was sentenced to 41 months in prison and three years of supervised release. Mete was also ordered to make full restitution to his victim investors and pay $666,851 to the IRS. On Dec. 4, 2013, Mete pleaded guilty to wire fraud and tax evasion. According to court documents, from approximately 2009 to November 2012, Mete operated an investment fraud scheme in which he held himself out as a broker of hard money loans between investors and purported individual borrowers who were willing to borrow money at interest rates of 15 to 18 percent. In fact, there were no such borrowers. In order to induce the investors to extend loans to the purported borrowers through him as the broker, Mete created false documents using the names of the fictitious borrowers. Mete forged signatures on the checks he received from the victim investors and deposited the funds into several bank accounts he opened in the borrowers’ names. Mete defrauded investors of approximately $1,191,610 and used the funds to pay for various personal expenses. Mete also failed to file federal income tax returns from 2009 to 2012, causing a tax loss of approximately $357,324.

Fiscal Year 2014 – Non-filer Investigations
Fiscal Year 2013 – Non-filer Investigations

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How Changing the IRS Notice Color Could Allay Fears

Anyone who has received an IRS notice knows all too well the feeling of fear and dread, even though they may have done nothing wrong! A recent article by Don’t Mess with Taxes author Kay Bell titled: “A Colorful Way to Ease IRS Notice Fearsshines a bright spotlight on how an unopened IRS notice can evoke panic and how some people think that should change.

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Bell begins her post by relating her experience where she received two separate IRS notices; a correspondence audit and a tax refund. The explanatory letter that arrived a few days after her refund check indicated that she had used the wrong tax table figure and was therefore entitled to the hundreds of dollars the IRS refunded.

As for the correspondence audit, some investment income had been overlooked on a previous return. Therefore, Bell did indeed owe Uncle Sam a bit more tax, plus an IRS penalty and interest.

What’s most interesting was Bell’s visceral reaction to both notices or as she describes it “[her] heart rate immediately jumped to Olympic sprinter pace.” By no means is Bell alone in her experience. She cites a letter by Adam Chodorow, a professor at Arizona State’s Sandra Day O’Connor College of Law and tax panicker, to Tax Analysts explaining his idea of how to ease such tax correspondence induced panic attacks.

Chodorow suggests color-coding the IRS envelopes so that taxpayers will immediately know the amount of tax trouble they are in. The following is the color code for IRS correspondence that Chodorow came up with that could conceivably abate taxpayer stress.

  • Green envelope, according to Chodorow would signify low risk correspondence such as an inquiry about another taxpayer or perhaps a refund.
  • Blue could indicate a simple query, perhaps about an inadvertent failure to report some minimal income amount.
  • Yellow might indicate a more significant audit letter.
  • Orange might signify an office audit that might equal $10,000.
  • A Red notice means big problems or as Chodorow puts it “you’re screwed.”

This is an interesting topic to ponder because it could have the potential to help people be less afraid to open their mail, read the letter and take the proper action. Nevertheless, given the deep seated fear of the IRS notice, it seems that no matter what color the envelope, taxpayers will still be afraid of the tax man – no matter what.

If you are avoiding the IRS because you have tax issues that you are afraid of, don’t wait for a colored envelope to arrive before you take action.

If you owe more than $10,000 in back taxes, have received an audit letter or are under audit, you need to hire a certified tax resolution specialist who is accustomed to dealing with the IRS. This tax pro can properly organize your records and help negotiate an IRS payment plan so your IRS problems become a thing of the past.

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ID Theft and Tax Refund Fraud-A Growing IRS Problem

A recent government report shows just how big and nearly out of control ID theft and tax refund fraud issues are for the IRS. A recent Reuters article titled: “Tax Refund ID Theft is Growing ‘epidemic’: U.S. IRS watchdogcites a the Treasury Inspector General for Tax Administration (TIGTA) report illuminating the increase in stolen names and Social Security numbers that scammers use to file phony electronic tax forms for IRS refunds.

The Reuters article focuses on the following important information from the TIGTA reports:

  • More Americans’ identities were stolen in tax refund crimes in the first six months of 2013 than in all of 2012
  • About 1.6 million Americans were victims of ID theft/tax refund crimes in 2013 through June, up from 1.2 million taxpayers in all of 2012.
  • While the number of frauds has risen, the report shows the total federal revenue lost to these crimes has decreased. In 2011, the government lost $3.6 billion in potentially fraudulent tax refunds, down from $5.2 billion in 2010.
  • ID thieves are increasingly working from abroad. In 2011, someone using a single mailing address in Lithuania made more tax filings with fraudulent Social Security numbers than any single U.S. address. The report provides two examples: A Lithuanian address received $220,489 in fraudulent IRS refunds; an address in Shanghai received $156,533.

According to the Reuters article, the IRS acknowledges the tax refund fraud explosion in recent years. The agency has agreed with TIGTA’s recommendations and admits it needs to get better at the following:

  • Spotting red flags signaling potential fraud in tax filings, such as multiple filings from the same address.
  • Help victims more quickly.

However, the agency maintains that the constantly evolving tactics used by scammers to commit identity theft continues to be one of the biggest challenges they face.

If you owe more than $10,000 in back taxes, have received an audit letter or are under audit, you need to hire a certified tax resolution specialist who is accustomed to dealing with the IRS. This tax pro can properly organize your records and help negotiate an IRS payment plan so your IRS problems become a thing of the past.

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MIllions of US Residents fail to file tax returns

About 7 million U. S. Taxpayers fail to file required income tax returns each year, while 146 million Americans dutifully file their returns each year. That means that about 5% of the populace fail to meet their obligations to Uncle Sam. As part of its National Research Program the IRS released a study in 2011 of 2006 returns which found that as result of non-filing, the government loses $28 billion per year. Although the IRS makes efforts to force non-filers into compliance, the continuing improvident cutting of the IRS budget allows more taxpayers to duck their filing obligations because the IRS has fewer resources to pursue non-compliant taxpayers.

As a tax controversy lawyer I frequently meet with taxpayers who have failed to file multiple years of returns. Many of those clients ask, “Should I file the return right now, or wait until I have the money to pay it?” The answer is simple: file it as soon as possible!

If the taxpayer has any money at all available for payment, it should be enclosed with the return. The reason for such advice is that one of the largest penalty rates which the IRS may impose is for late filing of a return. The penalty is five percent per month, up to a maximum of 25%, of the tax due but unpaid by the due date of the return.  This works out to an annualized rate of 60%. Therefore, if one fails to file their return on time, the effective annual rate is over 75% when both interest and late filing and late payment penalties are considered.  The late payment penalty after notice of intent to levy is one percent per month, or an effective rate of 12% per year in addition to statutory interest. In addition to the above considerations a taxpayer might also forfeit refunds due from delinquent returns since any return filed more than 3 years after its due date cannot receive a refund.

One drawback of filing a timely return without remittance is that the IRS will arrive at the taxpayer’s door to collect the liability much sooner than if he or she files a return late. However, the additional cost for penalties incurred to gain this time is prohibitive.

Criminal Prosecution

An additional consideration in advising the taxpayer to file returns, even if he or she does not have money to pay the balance of tax due, is the potential criminal penalties for failure to file a tax return. Therefore, if your client should fail to file a return, and if the Internal Revenue Service should decide that such action constituted willful fail­ure to file, your client might be required to defend against a federal criminal charge.

The chances of prosecution for non-filing are small, but certain groups are targeted by the IRS. Politicians, tax protesters, drug dealers, organized crime figures and high income professionals are prime targets for IRS prosecution. The IRS uses prosecution for its deterrent effect on the general public, and these groups get larger headlines than the average guy on the street. Congress has allocated additional funds to the IRS to pursue drug dealers.

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You have been Audited by IRS, Now What?

The IRS’s recently released Fiscal Year (FY) 2011 Enforcement and Service Results, show some interesting trends in its audit activity. For example, face-to-face audits of individual taxpayers reporting income over $200,000 increased by 34 percent as compared with FY 2010, from 58,521 to 78,392. Also, the IRS is now auditing about one out of every eight taxpayers who reported over $1 million in income.

Overall, with 140,837,499 individual income tax returns filed in the 2010 calendar year, the IRS conducted and closed a total of 1,564,690 audits in FY 2011, for a “coverage” rate of 1.11 percent. This is about the same coverage rate as in the previous fiscal year, but as noted above, the IRS is increasingly focusing its face-to-face audit resources on more affluent individual taxpayers. (I’ll explore the impact of the IRS‟s conducting 78 percent of individual audits by correspondence – as opposed to face-to-face – in future
postings.)

These statistics, however, only tell a small fraction of the story about the IRS’s compliance contacts with individual taxpayers. As reported in the recently released National Taxpayer Advocate’s 2011 Annual Report to Congress, the IRS not only conducted 1.6 million audits of individual taxpayers in FY 2010; it also reached out and touched an additional 13.5 million individual taxpayers during that year in a way that often felt like audits to the taxpayers impacted, even if the IRS doesn‟t technically classify all those contacts as “audits.”

These non-audit “touches” focus on a very different group of taxpayers in terms of income level. More importantly, non-audit audits (let’s call them “unreal” audits, as opposed to the ones the IRS considers “real”) do not trigger very important taxpayer protections enacted by Congress over the years to ensure that taxpayers are treated fairly in examinations.

Now, a word about IRS numbers. For this blog posting, I asked my research staff to give me a breakdown of FY 2010 “real” and “unreal” audits by income level. To do that, they used the IRS Compliance Data Warehouse, an internal IRS research database that houses taxpayer account information by tax year. The numbers in our breakdown do not exactly mesh with what the IRS reports in its Statistics of Income Data Book. In part, this is because we counted each taxpayer only once. So, for example, the IRS conducted 1.6 million individual audits in FY 2010, but the audits affected only 1.4 million taxpayers; some taxpayers may have been audited for more than one year. Similarly, if a taxpayer was touched by more than one program, we count him or her in just one of the programs, with the order of preference for counting purposes as Examination, Automated Substitute for Return, Automated Underreporter, and Math Error. (I’ll explain these terms below.)

Two more notes on the data. First, for the discussion and table below, we excluded 4.6 million math error notices that the IRS says related to the Making Work Pay credit. The IRS says these notices advised taxpayers who had failed to claim the credit that they were entitled to it. Although we haven’t verified this statement, we agree that if true, giving taxpayers a refund wouldn’t feel like an audit to the taxpayer and therefore should not be included in our totals.

Second, our income breakdown in the chart below is based on each taxpayer’s self-reported Adjusted Gross Income. Because the ASFR program generates returns for taxpayers who have not filed returns on their own, we do not have an AGI breakdown for Automated Substitute for Returns (ASFRs). Therefore, ASFR amounts are listed only in the “Total” row at the bottom and are not included in the column labeled “Combined” or in the percentages in the final column (except for the grand total).

Now to the results. In addition to conducting “real” audits of 1.4 million individual taxpayers in FY 2010, the IRS conducted “unreal” audits of 9.2 million individual taxpayers as follows:

  • 3,911,005 Automated Underreporter (AUR) cases, in which the IRS matches income reported by the taxpayer on his or her return with income reported to the IRS by third-party payers;
  • 4,740,909 math error notices, in which the IRS corrects and assesses mathematical or other inconsistent entries on a return before the taxpayer has a chance to contest the change; and
  • 563,927 Automated Substitute for Returns (ASFRs), in which the IRS creates a substitute return for a nonfiler based on third-party payer information.

As the chart below indicates, the combined impact of “real” and “unreal” audits in terms of coverage by income segment is very different from that of “real” audits alone.

Although the “real” audit coverage rate for individual taxpayers with incomes below $100,000 is about 1 percent, the combined coverage rate balloons to 6.9 percent, an increase of over 600 percent, when we include “unreal” audits in the mix. For individual taxpayers reporting incomes between $100,000 and $200,000, the FY 2010 “real” audit coverage rate is 0.6 percent, but when we include the “unreal” audit contacts, the coverage rate rises to 7.3 percent – an increase of about 1,100 percent. Including “unreal” audits also increases the coverage rate of the wealthiest taxpayers – those reporting incomes over $10 million – from 13.1 percent to 21.4 percent. (And these totals understate the total number of “unreal” audits because the percentages within income categories don’t include ASFRs and because there are a few additional programs that adjust taxpayer liabilities, including some flagged by the Electronic Fraud Detection System, that we have not addressed here.)

Now, why does all this matter? First, because understating the coverage rate actually masks how much work the IRS is doing. Second, and more significantly, because the type of contact – whether it’s a “real” or “unreal” audit – makes a difference in the rights afforded taxpayers and also in the halo, or indirect, compliance impact of that contact. For now, I’ll focus on the taxpayer rights impact and discuss the halo effect in later postings.

The tax law grants the IRS the authority to examine any books, papers, records, or other data that may be relevant to ascertain the correctness of any return. (See IRC § 7602(a)(1).) The IRS has taken the position that an attempt to resolve a discrepancy between the taxpayer’s return and data available from a third party does not constitute an examination because the IRS is not examining books or records but merely asking the taxpayer to explain the discrepancy. (See Rev. Proc. 2005-32, § 4.03, 2005-1 C.B. 1206.)

When the IRS doesn’t classify these tax adjustments as audits, the IRS doesn’t trigger the taxpayer’s right to avoid unnecessary examinations. (See IRC § 7605(b).) This position enables the IRS to later conduct a “real” audit of a taxpayer who already has been subjected to an “unreal” audit of the same return.

From the IRS‟s perspective, it is important to preserve its ability to conduct “real” audits because these “unreal” audits typically focus on limited issues such as an omitted income item. But from the taxpayer’s perspective, being contacted by the IRS more than once about one year’s return can feel like… well… at least one time too many.

This distinction takes on added significance when we consider that the overwhelming majority of taxpayers who are subject to “unreal” audits are low income or middle class, and these taxpayers are least able to afford representation in resolving their disputes. They may not even know when their rights are being violated.

In addition, the IRS is likely to start conducting “unreal” audits of business taxpayers, including self- employed individuals, by matching income reported on tax returns against third-party reports of gross receipts submitted by issuers of credit and debit cards. (See IRC § 6050W.) Any resolution of mismatches will most assuredly require the IRS to review the taxpayer’s books and records. Yet because the IRS doesn’t consider these Automated Underreporter contacts to be “real” audits, the IRS will retain the right to conduct a second review of the taxpayer’s books and records for the same tax year. I cannot believe that Congress, in enacting the protections of IRC § 7605(b), contemplated this result.

In our 2011 Annual Report, we recommended the IRS should, “[i]n light of the information available in the 21st century, review and reassess the audit processes deemed „not an examination‟ and instead use the audit process to protect taxpayer rights, increase compliance, and preserve IRS credibility.” To buttress that recommendation, I issued a Taxpayer Advocate Directive to several key IRS officials during the same week we released our report, directing them, among other things, to conduct a comprehensive review of “unreal” audits and revise the definition of what constitutes an audit to address my concerns about taxpayer rights. These officials can implement my directive or appeal it to the Commissioner or Deputy Commissioner, who have the authority to overturn it. We’ll let you know if we make any progress.

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