Technology glitches with new software at
the Internal Revenue Service caused it to initially reject nearly a quarter of the 127,105
tax returns it processed during its first three
weeks of operation in February.
A new report by the Treasury Inspector
General for Tax Administration also found
that the IRS has not addressed many of the
security vulnerabilities identified last December in the software. Information provided
by the IRS in December showed that 10 of
the 13 security vulnerabilities were resolved.
However, a security test and evaluation in
January found that only two of the 13 vulnerabilities had been resolved.
The IRS’s Modernized e-File system is
replacing the current tax return filing technology, at an estimated cost of $574 million.
The MeF is supposed to streamline filing processes and reduce the costs associated with
paper returns. Since its initial release in 2004,
New IRS software rejected 23% of e-filed returns
waShINgtoN, D.c.
the MeF system has processed corporate, ex-empt-organization and partnership returns.
MeF Release 6. 1, which was estimated to
cost $78 million, was deployed in February
2010, and includes the Form 1040 and 21 other forms and schedules. Future releases will
include the remaining 120 IRS tax forms.
However, the TIGTA report found that the
MeF project development team did not adequately manage the testing of Release 6. 1
prior to deploying the system. While the IRS’s
own test report showed that all the requirements were tested and passed, TIGTA auditors found documents showing that many of
the requirements were not tested, many more
failed the tests, and no indication was provided to show the defects were corrected.
Subsequently, the system rejected 23 percent of the individual returns e-filed during
its initial three weeks of operation. The system was expected to be able to process 10. 9
million forms, based on 2009 volumes, but it
was able to handle only 127,105.
“The purpose of the Modernized e-File sys-
tem is to enable more individual taxpayers to
take advantage of the benefits of electronic
filing, while reducing the costs associated
with paper tax returns,” said TIGTA Inspec-
tor General J. Russell George in a statement.
“Since two out of three taxpayers now file
their returns electronically, it is critical that
the IRS ensure that the Modernized e-File
system is delivering expected results.”
TIGTA recommended that the IRS ensure
that releases are deployed only after verify-
ing that all requirements have been tested;
consider lessons learned from prior deploy-
ments; and ensure that the MeF team enters
and tracks all security weaknesses in IRS con-
trol systems. The IRS agreed with most of the
recommendations and stated that corrective
actions have been taken or started. AT
are not automatically employees. Instead,
common-law analysis of the worker’s status
is applied. In that case, the employment tax
examination proceeds to look at three catego-
ries: behavioral control, financial control, and
the relationship of the parties. Within these
three categories, the IRS will apply its 20 com-
mon-law factor test as first announced in Rev.
Rul. 87-41. No one factor is determinative,
nor are all factors necessarily present in any
employee or independent contractor rela-
tionship. While the examiner generally tries
to resolve questions through documentation
first, in-person interviews of workers and the
employer are not so rare that they should not
be anticipated.
Government Entity Division. Those audits will
not stop if the taxpayer qualifies for the Section 530 safe harbor. Each year, the IRS plans
to audit 2,000 taxpayers. Officials say they are
on target to achieve that level for 2010.
The last employment tax NRP was conducted in 1984; IRS officials have acknowledged
that employment tax practices have drastically changed since then. IRS officials also say
that they will not wait until the 2012 close of
this program but will use data from this NRP
on the fly as audit opportunities unfold.
holding a substantially similar position) was
not an employee, or if an IRS employment tax
examination concluded the same.
The Obama administration also supports
changes to worker classification rules. The
president’s fiscal year 2011 federal budget
proposes to reform Section 530, to allow the
IRS to issue generally applicable guidance on
worker classification, and to increase funding
of the Labor Department to hire additional
enforcement personnel and more closely coordinate activities with the IRS.
HOMEBUYER TAX CREDIT
DEADLINE EXTENDED
WASHINGTON, D.C. — Eligible taxpayers
who contracted to buy a home qualifying for the First-Time Homebuyer Credit
before the end of April now have until
Sept. 30, 2010, to close the deal, according to the Internal Revenue Service.
The Homebuyer Assistance and
Improvement Act of 2010 extended the
closing deadline from June 30 to September 30 for any eligible homebuyer
who entered into a binding contract on
or before April 30 to close on a home on
or before June 30, 2010. The new law
addresses concerns that many homebuyers might be unable to meet the original
June 30 closing deadline.
The IRS reminded taxpayers that
special filing and documentation
requirements apply to anyone claiming the homebuyer credit. To avoid
refund delays, those who entered into a
purchase contract on or before April 30,
but closed after that date, should attach
to their return a copy of the pages from
the signed contract showing all parties’
names and signatures if required by local
law, the property address, the purchase
price, and the date of the contract.
EMPLOYMENT TAX NRP
To get a better handle on employment tax
compliance in tailoring more effective audits,
the IRS has begun conducting employment
tax National Research Project exams. Under
the program, the IRS will conduct 6,000 random audits of taxpayers over the next three
years, taken equally from the Large and Mid-Size Division, the Small Business and Self-Employed Division, and the Tax-Exempt/
PROPOSED LEGISLATION
Congress is determined not to be left behind
in improving employee classification compliance. It sees putting pressure on the IRS to
improve enforcement statistics as one necessary focal point. It also has been looking
into making changes in the law, not only to
improve compliance as a goal in and of itself,
but also as a means of presenting “
revenue-raising” provisions to offset tax cuts in conformity with “pay-go” rules.
Four bills have been introduced so far during the 111th Congress to address the misclassification of workers. S. 3254 and HR 5107, the
Employee Misclassification Prevention Act,
would require employers to maintain records
of non-employees who work for them and
would impose stiff penalties on misclassifying
employees as non-employees. S. 2882 and HR
3408, the Taxpayer Responsibility, Accountability and Consistency Bill, on the other
hand, would all but eliminate the existing
Section 530 safe harbor. It would allow safe
harbor relief only if independent contractor
classification has been based on a reasonable
reliance on either a written determination
from the IRS that the individual (or someone
CONCLUSION
Worker classification is primarily a small-business issue when it comes to strategies,
since larger operations generally establish
protocols in hiring that safeguard against incorrect classification. Best practices nevertheless should be pushed down into smaller
enterprises as closer scrutiny and higher penalties for noncompliance make their way into
mainstream IRS audit procedures.
Change is likely coming in worker classification, in the form of not only more robust enforcement of existing rules but also less leeway
than now given to incorrect classifications.
The “when” and the “how” are still not entirely
settled. The competing argument against immediate change, of course, is itself convincing:
Businesses that are the engine of an economic
and “jobs” recovery cannot afford misclassification penalties while they continue to operate on razor-thin profit margins.
No matter what the eventual timetable,
however, businesses would do well to review
their present worker classification procedures
and prepare in advance the evidence needed
to receive a “no change” on any audit that
may develop. AT
IRS CRIMINAL INVESTIGATORS
PURSUE L.A. TAX PREPARERS
LOS ANGELES — The Internal Revenue
Service’s Criminal Investigation Division
has stepped up its prosecutions of tax
preparers in Southern California.
“In the months following the 2009 tax
filing season, legal actions have been
taken against several dishonest tax preparers in our communities,” said Leslie P.
DeMarco, special agent-in-charge for IRS
Criminal Investigation in Los Angeles.
In early July, former IRS revenue officer Anthony Pendleton, owner of Payless
Tax Services in Inglewood, was sentenced to 41 months in prison after he
was convicted of conspiracy to defraud
the U.S., while Moreno Valley tax preparer Willena Stargell was found guilty of
12 charges relating to tax and financial
fraud, and identity theft, and faces at
least two years in prison. Meanwhile,
Chris Dobison, a Rancho Cucamonga
tax preparer, pleaded guilty to aiding
and assisting in the preparation of false
tax returns, and faces up to 12 years in
prison; and Joseph Usunubu Aluya, a
Placentia tax preparer, pleaded guilty to
stealing over $320,000 in refunds from
clients. He faces up to five years for tax
evasion and up to 10 years for possession of stolen government money.
