Treasury Exec Blasts Tax System

Mark Mazur is a heavyweight numbers guy and he didn't mince words about the current state of American business tax policies during a recent speech.

“The business tax system today is inefficient, overly complex, and too riddled with loopholes,” Mazur said, making it difficult for US business to function as a world-class system.

Mazur, assistant secretary for tax policy at the U.S. Department of Treasury, a position to which he was appointed in 2011 by President Barack Obama, made the comments while addressing the NYU/KPMG Tax Lecture Series, according to an article in Accounting Today.

Chances are, Mazur's patience is wearing thin from having to help his employer deal with the intense criticism aimed at the Treasury Department's red-headed stepchild - the Internal Revenue Service - over the past few years.

Worse news came today when, writing for Forbes Magazine, Robert W. Wood reported that the IRS doled out $3 billion in erroneous business tax credits to corporations that did not qualify and handed out $5.8 billion in erroneous tax refunds in 2013 alone.

The tax credits are for business taxpayers, Wood said, and covered such varied activities as providing childcare for their employees’ children. In 2013, corporations claimed more than $93 billion worth of tax credits, the report reveals. But it turns out many of those credits were wrong. Mistakes were found in over 3,000 electronically filed corporate tax returns.

Ironically, just last week, IRS Commissioner John Koskinen said that the agency is significantly under-funded, and those cuts mean there will be a decline in service for taxpayers, and pledged that service would improve if they got more money.

"Customer service -- both on the phone and in person -- has been far worse than anyone would want," Koskinen said. "It's simply a matter of not having enough people to answer the phones and provide service at our walk-in sites as a result of cuts to our budget."

But a congressional panel report found recently that the IRS had cut customer services while continuing to hand out bonuses to employees, allowing staff to conduct union activities, failing to collect debt owed by employees of the federal government and spending over $1.2 billion on implementing ObamaCare, according to Fox News.

The panel reported that even though the IRS’s budget for taxpayer assistance remained flat from fiscal year 2014 to 2015, the level of over-the-phone customer service significantly decreased, with the agency shifting staff in customer service to focus on written correspondence instead of telephone calls. Meanwhile, the number of calls doubled in that period.

The panel found that wait times increased from 18.7 minutes to 34.4 minutes, and answered calls decreased from 6.6 million to 5.3 million.

“In January 2015, the IRS commissioner estimated that taxpayer service would decline while delays in tax refunds would increase. While the IRS commissioner has blamed this solely on budget cuts, in reality the IRS deliberately diverted resources away from taxpayer services,” the report found.

Despite the drop in service, there was no significant decrease in bonuses for IRS employees. Notably, in November 2014, despite another round of budget cuts at the IRS, Koskinen announced that employees would receive bonuses at the same level as for the previous year, unless they had substantiated conduct issues, the report said.

So clearly, Mazur has reason to be concerned. The IRS is a complete mess. The question, though, remains...what will be done about it?

GAO Says IRS' Internal Controls Could Result in Security Breaches

Neikirk, Mahoney & Smith, an accounting firm based in Louisville, reports that in their most recent audit, the General Accounting Office (GAO) has slammed the Internal Revenue Service, citing ongoing weaknesses in internal controls and management that could result in taxpayer security vulnerabilities.

Citing "serious control deficiencies", the GAO says the corrective actions the IRS has taken have fallen short because of the failure of the IRS to fully address the system enhancements that will be required to fix the problems. System weaknesses cited in the audit include weaknesses in information security, including missing security updates, insufficient monitoring of financial reporting systems and mainframe security, and ineffective maintenance of key application security.

The most frightening aspect of the GAO's report is until the problems are resolved, there is an increased risk that taxpayer data will be vulnerable to "inappropriate and undetected use, modification or disclosure."

From the audit report, the "IRS did not maintain effective internal control over financial
reporting as of September 30, 2014, because of a continuing material weakness in internal control over unpaid tax assessments. GAO’s tests of IRS’s compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements detected no reportable instances of noncompliance in fiscal year
2014.

The material weakness in internal control over unpaid tax assessments was primarily caused by financial system limitations and errors in taxpayer accounts that rendered IRS’s systems unable to readily distinguish between taxes receivable, compliance assessments, and write-offs in order to properly classify these components for financial reporting purposes. These deficiencies necessitated the use of a compensating estimation process to determine the amount of taxes receivable, the most material asset on IRS’s balance sheet.

Through this compensating process, IRS made almost $17 billion in adjustments to the 2014 fiscal year-end gross taxes receivable balance produced by its financial systems. Serious control deficiencies related to unpaid tax assessments are likely to continue to exist until IRS significantly enhances the capabilities of the systems it uses to account for unpaid tax assessments, and improves
controls over the recording of information in taxpayer accounts so that reliable transaction-based balances for taxes receivable can be ultimately recorded in its general ledger system.

However, IRS’s current corrective action plan does not fully address all of the system enhancements needed to accurately classify unpaid tax assessment transactions, and IRS has yet to identify the underlying control deficiencies causing the errors in taxpayer accounts.

During fiscal year 2014, IRS continued to make important progress in addressing deficiencies in internal control over its financial reporting systems. However, GAO identified new and continuing deficiencies in internal control over information security, including missing security updates, insufficient monitoring of financial reporting systems and mainframe security, and ineffective maintenance of key application security, that constituted a significant deficiency in IRS’s
internal control over financial reporting systems.

Until IRS fully addresses existing control deficiencies over its financial reporting systems, there is an
increased risk that its financial and taxpayer data will remain vulnerable to inappropriate and undetected use, modification, or disclosure.

In addition to its internal control deficiencies, IRS faces significant ongoing financial management challenges associated with (1) safeguarding the large volume of sensitive hard copy taxpayer receipts and related information, (2) its exposure to significant invalid refunds from identity theft, and (3) implementing the tax provisions of the Patient Protection and Affordable Care Act. The difficulties confronting IRS in its efforts to effectively manage each of these challenges are further magnified by the need to do so in an environment of diminished budgetary resources.

Read the full audit report here. http://www.gao.gov/assets/670/666863.pdf

Conservative Groups' Lawsuits Against IRS Dismissed

A federal judge has dismissed a pair of lawsuits against the Internal Revenue Service by over 40 conservative groups over the IRS’s handling of their applications for tax-exempt status, according to Michael Cohn in Accounting Today.

Judge Reggie Walton of the U.S. District Court in Washington pointed out in his ruling Thursday that the IRS had changed the way it reviewed the tax-exempt applications and had approved most of the groups, and that federal courts do not allow financial claims against individual defendants in the IRS for constitutional violations.

The lawsuits were filed on behalf of conservative groups such as True the Vote and Linchpins of Liberty by the American Center for Law and Justice.

The IRS has come under fire from conservative groups since last year for using terms such as “Tea Party” and “Patriot” to review applications for tax-exempt status under Section 501(c)4 of the Tax Code. The controversy led to the ouster of the former director of the IRS’s Exempt Organizations unit, Lois Lerner, along with other IRS officials.

The head of at least one conservative organization was dismayed by the dismissal of the lawsuits. “This ruling is offensive to every citizen who believes in equal treatment under the law,” said FreedomWorks executive vice president Adam Brandon in a statement. “It doesn't matter when the IRS bullied conservative groups or if they stopped, the point is that it was done, and the IRS has to be held accountable. Today's decision was the legalization of federal bullying and unchecked discretionary authority, so long as agencies can play the waiting game long enough to correct their misdeeds. The fact that it occurred in the first place was appalling, but the fact that it was excused by the courts was disgraceful."

If you - or someone you know - is considering a filing for tax-exempt status, contact Neikirk, Mahoney & Smith. Neikirk, Mahoney & Smith's tax experts can help you streamline the process and maximize the chances for a prompt approval from the Internal Revenue Service.

Lois Lerner Gets Some Payback

In an absolutely hilarious article by Michele Kirk in BizPac Review, conservative activist Jason Mattera recently found himself in a position that a lot of conservative Americans with they could be in as he happened along Lois Lerner walking her dogs.

Unlike a lot of us, though, Mattera had the nerve to say things to Lerner that a lot of us can only fantasize about.

"Mattera brutally pummeled the shamed former IRS director with requests for an apology to conservatives for using the government as a weapon to target them. He taunted her by saying things like “How does it feel to be targeted? You don’t like it do you?”

"Lerner ran for cover to a neighbors house where she knocked, and knocked and begged to come in.

"Oops, it must have been a conservative neighbor because, they wouldn’t let her in!

"When the man of the house finally came around from the back, Lerner told him she had been asking his wife to let her in because the press was bothering her.

"Not hearing what Lerner said to him, the man was still confused."

Mattera explained “She’s trying to get in your house, she doesn’t want to answer questions.”

"The elderly neighbor’s classic response, “I don’t want her in my house.” OUCH!

"Mattera didn’t miss a beat. “I don’t blame you,” he said. “I wouldn’t want her in my house either.”

"Thoroughly scorned, Lerner scurried to another house for cover."

Mattera has a history of ambushing deserving liberals.  His latest book, “Crapitalism” takes them on in writing.