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IRS and State initiatives to assess and collect Penalties

Although many taxpayers do not believe it, Income Tax rates have fallen over the past ten years to the point that the IRS and many of the States are now taking a cue from the banking industry to increase revenues. Penalties for late payments, late filings, and for newly defined "negligence" in deducting too aggressively are making their appearance with increased frequency.

In years past, taxpayers might have only occasionally received an inquiry about their tax return, or a small penalty for paying tax late or filing the tax return late.

This is all changing, and quickly.

Penalties are getting larger, are assessed more frequently and are being pursued aggressively. In that regard, for years our standard engagement letter said that clients would be billed for the time expended to correspond with the government as your advocate (unless we were at fault, of course). But in practice we have never billed for routine inquires, penalty abatement work, and even for some of the very minor tax audits. With this new aggressive onslaught by the IRS and the State the time and effort now to defend against them has gotten to a point that we will need to charge for handling them.

The typical action by the IRS now includes an Automated UnderReporter (AUR) "CP2000" notice which is completely computer generated by matching your form 1040 to submitted items from 3^rd parties such as 1099s, schedule K-1s, W-2Gs and so on.

Late filing S-corporation returns (form 1120S) prior to 2007 were a percentage rate times the amount of tax unpaid. Since S-corporations virtually never pay a tax, this penalty would compute to be zero. This is now changed. The penalty is $85 per month (counting from March 15^th whether you were on extension or not) to a maximum of $1,020 penalty per shareholder K-1.

Late filing LLC and partnerships (form 1065) have a similar penalty now. Prior to 2007 it was $50 per month to a maximum of $250. The penalty now is $85 per month (counting from April 15^th whether you were on extension or not) to a maximum of $1,020 penalty per partner K-1.

The States are not standing still on this either. They are also assessing for underpayments or otherwise late payments and for late filing. The States are now making more inquiries and are initiating more audits themselves, whereas in the past the States simply piggybacked on the IRS audit results.

The IRS and the State have joined forces to begin a nationwide crackdown on what they perceive to be payroll tax abuse. The timeliness of submitting taxes and redefining subcontractors to employees are but two items on their agenda.

Related links:

Avoiding IRS Penalties

IRS Penalty Traps

Increases for late filing partnership and s-corp tax returns

New Disclosure and Consent Penalties became effective January 1, 2009.

Consent forms are located here

Federal law already strictly prohibited the IRS from making disclosures of taxpayer return information within its control to third parties except with taxpayer consent or in other circumstances set by Congress. The new rules apply only to tax return information held by income tax return preparers.

Among the new rules:

Generally, preparers must obtain taxpayer consent, either by paper or electronically depending on how the return is being filed, before tax return information can be disclosed to any third party or used for any purpose other than filing the return.
If the taxpayer consents to the disclosure and use of his information, the consent must identify the intended purpose of the disclosure, identify the recipients and describe the particular authorized disclosure or use of the information.
Mandatory language informs individual taxpayers that they are not required to sign the consent; that if they sign the consent, federal law may not protect their information from further disclosure; and that if they sign the consent, they can set a time period for the duration of that consent. If taxpayers fail to set a time period, the consent is valid for a maximum of one year.
To prevent consent requests from individual taxpayers from being buried in fine print, the rules require the paper consent documents to be in 12-point type on 81/2 by 11 inch paper and require electronic consent requests to be in the same type as the Web site’s standard text, all to prevent consent requests from being too difficult to read for individual taxpayers.
If a taxpayer declines to provide consent for an unrelated tax preparation disclosure or use request, the preparer cannot make a similar consent request. The intent is to protect taxpayers from being pressured with repeated consent requests regarding the same issue.
Mandatory consent from taxpayers also is required if the tax information is going to be disclosed to a tax preparer located outside the United States. This provision is intended to ensure taxpayers are informed if their tax information is being sent off-shore for return preparation. The individual taxpayer’s Social Security Number also must be redacted.

Treas. Reg. 301.7216-3

The consent must be signed by the taxpayer or his agent, and must contain the following:
(1) the name of the tax return preparer;
(2) the taxpayer's name;
(3) the purpose for which the consent is being furnished;
(4) the date;
(5) a statement that the return information may not be disclosed or used by the preparer for any purpose (not otherwise permitted under the regulations) other than that stated in the consent; and
(6) a statement by the taxpayer that he consents to any disclosure or use of the information in connection with another person's return.

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