Congressional Actions Necessitate Professional Tax Preparers

With just over one month until individual income taxes must be filed with the IRS, Congress is yet again considering a last-minute change to tax laws that will only further complicate the preparation of 2009 income tax returns.

Following the earthquake in Chile, the chairman of the House Ways and Means Committee introduced legislation that would allow taxpayers to deduct on their 2009 income tax returns donations made in 2010 for Chilean earthquake relief. Congress took the same action in response to the earthquake that struck Haiti earlier this year.

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Recession’s Tax Implications Clearer As IRS Releases Inflation Adjustments for 2010

Every year, various amounts embodied in the Internal Revenue Code are adjusted to reflect the increase in consumer prices, or inflation, as measured by the Consumer Price Index (CPI). Compiled by the Bureau of Labor Statistics (, the index reflects the increase in individuals’ cost of living over time and is used by various government agencies to ensure that their programs accurately reflect current economic conditions. In the case of the Internal Revenue Service, tax rates, deductions, and various thresholds are adjusted annually for inflation, while the Social Security Administration (SSA) uses CPI to adjust benefit amounts paid to recipients. As CPI for 2009 will likely show a drop in overall consumer prices (deflation), many amounts tied to CPI will either remain unchanged or decrease in 2010.

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Eight More Days to Disclose Unreported Foreign Bank Accounts

In the IRS’ ongoing battle against tax evasion, a key deadline is approaching. Individuals with previously-unreported offshore bank accounts have until next Wednesday, September 23, to disclose the accounts’ existence and pay both back taxes and penalties without facing criminal charges. The deadline comes as UBS prepared to turn over 4,450 account-holders’ names to the Department of Justice as part of the ongoing tax evasion investigation. Besides avoiding criminal penalties, individuals who voluntarily disclose their offshore accounts will not be subject to penalties for failing to file a Foreign Bank Account Report.

As Wendy Kaufman reported for NPR’s Morning Edition today, however, tax evasion cases can be hard to prove, making the decision to provide voluntary disclosure a particularly difficult one. Nonetheless, considering that the 4,450 names to be disclosed by UBS are just the starting point in the agreement between the Swiss and US governments, holders of undisclosed offshore accounts have reason to be concerned. Reflecting that concern, more than 400 voluntary disclosures were made in a single week in July of this year, more than were made in all of 2008.

UBS to Provide 4,450 Names

As The Wall Street Journal reports, UBS plans to release the names of 4,450 Americans holding UBS accounts as part of its settlement with the US and Swiss governments. The initial release of 4,450 names represents only about half of the total identities the US hopes to receive from UBS. With this information, the IRS and Department of Justice can begin criminal tax-evasion proceedings against these individuals. At issue is an estimated $10 billion on which US income taxes were never paid. Simultaneously with the announcement that UBS was releasing the names, the Swiss government moved to sell shares it held in the bank. This is largely seen as a move to distance the Swiss government from UBS at a time when it is increasingly interjecting itself into the banks affairs.

While the release of names was not unexpected (see “UBS, Swiss Government Reach Settlement with IRS” and “UBS Troubles Spread to Hong Hong“), it represents a significant weakening of the once-infamous Swiss bank privacy laws. To combat this problem, the process by which the IRS will receive the names is a bit tedious. UBS will first turn the names over to the Swiss government’s tax administration for review, after which the names will be forwarded to the IRS and Department of Justice. To begin, 500 names will be released, with the remaining provided in batches in future months. For the thousands of American clients of UBS who now find themselves in the government’s crosshairs, there is a bit of hope.

Until September 23, 2009, the US government is accepting voluntary disclosure of the accounts not previously reported to the Treasury. Theoretically, those who volunteer their information will face less-stringent prosecution than those the IRS discovers on its own. Either way, many individuals are likely to face criminal prosecution for tax evasion. Given that the average size of the UBS accounts in question is approximately $1 million, the fines and penalties can be substantial. Already, the IRS has begun prosecuting some former clients of UBS and reached settlements with others.

For more detail on the settlement and more information regarding the ongoing negotiations between the US government and UBS, see the Journal’s original article, “UBS to Give 4,450 Names to US.”

UBS’ Troubles Spread to Hong Kong

Following the settlement between the IRS, UBS, and the Swiss government, the IRS probe now widens to include UBS’ operations in Hong Kong. According to court documents filed by the US government, UBS used Hong Kong-based entities to launder funds received from its American clients. As The Wall Street Journal reports, recent plea agreements negotiated between American clients of UBS and the US government are beginning to reveal how the Swiss bank serviced its US clients in its ellaborate efforts to help clients evade US taxes. As these plea agreements continue to be publicized, we should begin to better understand the extent of UBS’ illegal activities and, hopefully, the extent to which the Swiss bank swindled the American public. Remember, the evaded income tax revenue has to be made up somewhere, be it through borrowings (sales of US Treasury bills) or other taxes.

UBS, Swiss Government Reach Settlement with IRS

Following months of negotiations and often-negative press, it appears that the IRS has reached a settlement with UBS AG and the Swiss government regarding an IRS probe into the identify of roughly 52,000 US customers of the Swiss banking giant. For months, the IRS has sought the identify of the UBS customers as part of an investigation in tax evasion. The IRS suspects that most of the individuals and entities whose identities it seeks have neither paid taxes nor declared the existence of their Swiss-based UBS accounts. Given the world-renowned strength of Swiss bank secrecy laws, the request has caused quite a headache for all parties involved.

While details of the settlement haven’t been released, one individual involved in the negotiations expects that more than 10,000 names will be released, representing roughly one fifth of the total sought by the IRS. For more information (what little is available), see today’s Wall Street Journal article “UBS, Swiss Reach Pact on U.S. Tax Probe.”

A Small Victory for Taxpayers

A recent Tax Court decision regarding demutualized insurance companies has wide-ranging implications for holders of stock in the demutualized companies. While the IRS had held that stockholders had no basis in the stock they received when the insurer demutualized, the Tax Court disagreed. For details on the court’s decision, visit This resource was set up by Minnesota CPA Charles D. Ulrich, who has long argued the IRS was wrong.

Stating the Obvious…in print!

Today’s Wall Street Journal Tax Report discusses the confusion caused by the alternative minimum tax (AMT) and the difficulty calculating it. As one who has prepared tax returns which include AMT, all I can say think is that this article is pointing out the painfully obvious.

Tom Herman’s article, entitled “How AMT Confuses Taxpayers,” can be found here.

Taxtalk: Praying on Desperation

(This is the first in a series of discussions on tax-related issues entitled Taxtalk. All of the articles in the series can be found at

A recent settlement between the IRS and tax-resolution firms should better protect taxpayers from companies trying to take advantage of their desperate situations. Tax resolution firms, such as J.K. Harris & Co., advertise heavily on television, touting the ability to drastically reduce tax bills for those individuals who owe substantial sums to the government. These firms claim they will help their customers navigate the IRS’ “offer in compromise” program, intended to allow taxpayers to settle their tax debt for what they can actually afford. But for many taxpayers, these tax-resolution firms resolve nothing, usually adding to the taxpayer’s problems instead.

According to complaints reported by The Wall Street Journal, many people who sought help from the likes of J.K. Harris & Co. and Roni Lynn Deutch paid fees to these companies and received nothing in return. One former Harris customer, Susan Brennan, paid $4,550 in up-front fees, only to have the firm omit important information she had provided to them. When informed of the mistakes, J.K. Harris requested additional money. When she refused to pay, Harris refused to provide further assistance. Ms. Brennan then sought help from a local accountant, who was able to resolve her problems for substantially less than what J.K. Harris charged her. This is just one of the examples cited in by the Journal, but others interviewed reported similar experiences.

At the heart of their settlement with the IRS are the advertising practices of tax-resolution firms. Complainants accused the firms of misrepresenting their services and overstating their abilities to lower tax bills. Based on the exaggerated claims made in their advertisements, many taxpayers paid several thousand dollars in fees with the understanding that their tax bills would be drastically reduced or eliminated. For these individuals, the fees paid were not inconsequential, as these people are already in troubled financial positions. Tax-resolution firms are able to deceive individuals into paying such exorbitant fees for their services because they prey on taxpayers’ desperation and ignorance.

For a taxpayer who finds him- or herself in a situation where the services of a tax-resolution firm are appealing, the options are limited. One of the best options may be the “offer in compromise” program, which is precisely what tax-resolution firms offer their clients. Unfortunately, these firms advertise much higher success rates than their clients can expect. In 2004, the IRS accepted 20,000 of the 106,000 offers made. In 2007, acceptance fell to 12,000 out of 46,000. As part of their settlement with the IRS, tax-resolution firms must comply with advertising restrictions and better represent their success in negotiating with the government.