Tax Season is over and now for another tale.

There is a very big project going on in which the IRS, State Tax Departments, State Attorney’s General and the Justice Department are engaged. Medicaid fraud cases involving home health agencies. It usually starts with a home health agency owned by non-citizens. If the agency is located in a state with income taxes, the state then commences a net worth tax audit on the business owner. Usually, as with any American, there are problems with the return. Then commences a criminal tax filing alleging tax fraud and because the company is owned by a new or non-citizen with ties overseas, they ask for no bond and make statements about the medicaid fraud investigation that they are pursuing. Many times they will get the tax preparers involved as well with offers of immunity. At that point, the Government can force open the books of the home health provider. The other trick is to have the IRS pursue an indictment for failure to collect and pay over employment taxes. Usually this is a civil issue, but for these cases they use the criminal means to again force open the books of the company. While there is a ton of fraud in the home health industry, this particular program seems to be similar to the old mafia investigations where corruption could not be proved, so tax laws are used instead. So, to home health agencies out there a couple of words of warning. (1) Pay your withholding taxes, even if you don’t pay yourself, your rent or any other bill; (2) Make sure your personal tax returns are unassailable. Don’t simply trust your preparer. Review the returns carefully to ensure that all items of income and expense are properly taken. Remember you sign those returns under penalties of perjury. (3) If the FBI, IRS, or a state tax agent starts an audit engage a seasoned tax professional to get involved at the earliest possible time. This could mean the difference between an indictment and a civil penalty,. If you have returns out there that have problems and YOU HAVE NOT YET BEEN CONTACTED BY AUTHORITIES, consider voluntarily amending them and paying the taxes, interest and penalties now. (or at least starting a voluntary payment arrangement with the tax authority). If you are an immigrant and have family members overseas that you support, try to keep a log of what you send overseas and to whom. That way, when the Government comes calling you have a record of where the money went. Lastly, remember that if your gifts to any one person (anywhere in the world) exceed $13,500 you need to file a Federal Gift tax return. With these tips you might avoid a long spell in jail.

More on the Pastor’s Housing Allowance

Judge Crabb is apparently friendly to folks who take a broad view of the Establishment Clause. She declared the National Day of Prayer unconstitutional (and probably will decide that Thanksgiving and Christmas should not be federal holidays at some point if given the chance), and she was reversed by the 7th Circuit Court of Appeals. But if the standing of the FFRF individuals is upheld, then pastors will have a problem because Section 107 is clearly friendly to religion. However under the Supreme Court test she cited the O’Connor test, the concept of religious neutrality has come in. Under that test you can’t discriminate against religious participation in universal government benefits, like school vouchers and free lunches to needy kids as long as you don’t require indoctrination with the use of those funds. The question here like all tax cases is of course the ever present, this is a tax case. This is where it gets interesting. Going back to Justice Roberts decision concerning Obamacare, a tax is a tax. Apparently, the 16th Amendment allowing the Government to tax income pretty much allows it to tax anything it wants including not having insurance. So, what if it exempts from income housing allowances for clergy and disability payments to Veterans. If Congress can tax something, they can choose not to tax something. The 16th Amendment gives Congress the power to lay taxes on income from whatever sources derived. Thus, Congress can pick and choose which incomes it wishes to tax even those that may be religious. So, interestingly enough, if this case goes to the Supreme Court, it may well be that the Obamacare ruling gives the Justices an out.

Wisconsin Judges Rules Pastor Housing Allowance Unconstitutional

In Freedom from Religion Foundation v. Lew (November 22, 2013, W.D. Wisc), Judge Crabb found that Section 107 of the Internal Revenue Service was unconstitutional. This follows on the heels of another case Freedom From Religion Foundation v. Geithner 715 F. Supp 2d 105(E.D. CA, 2010) in which the District Court found the Foundation to have standing to challenge Section 107 and found that the case should not be dismissed. Section 107 and its predecessors have been in the Code since 1921 when it declared that church provided parsonages or rectories were not income to the pastor. In 1954, Section 107(b) was added to permit churches to give Pastors’ a housing allowance to permit them to live somewhere other than a parsonage. In other words, this saved churches the cost of having to maintain parsonages and allowed states to tax the real estate lived in by the Pastor. Until this ruling no successful challenge has been mounted against Section 107. However most of those cases failed because the Courts ruled that the person bringing the suit did not have standing. See Warren v. CIR 302 F 3d 1012 (9th Cir., 2002); Kirk v. CIR 425 F 2d 492 (DC, 1970). In the Wisconsin case two officers of the FFRF the United States because they couldn’t exclude their specified housing allowance from income. Thus, they had standing because they suffered from this “discrimination” more than the general public. Judge Crabb did some handstands to find that they had standing since she did not deal with the Anti-injunction Act nor did she deal with the Declaratory Judgment Act issues in such a suit. Instead, these taxpayers standing should have been predicated upon whether or not they were owed a refund of tax for not permitting them a housing allowance. The Court did not address this, and that may be this case’s fatal flaw. Had the Court addressed that issue, it could have then moved to the Constitutional issues involved. Interestingly enough this law has been around for 90 years and this is the first Court to rule that the law is unconstitutional. Now the question becomes whether or not the Obama Administration and its Justice Department choose to defend the law on appeal as they refused to do in the DOMA case. If they do not, this ruling will stand, but it will only impact taxpayers in the Western District of Wisconsin. As a practical matter until the IRS comes out with guidance pastors will still be able to exclude such allowance since those pastors were not made parties to the lawsuit.

Dealing with IRS Collections

So, you get a bill from the IRS and the IRS is demanding payment from you. You don’t understand the bill, what is your next step? (1) Call IRS and ask for them to send or fax to you a copy of their calculation so that you can compare that to your records. There is an anecdotal story (which is legendary and may not be true) about a person who worked at one of the Service Centers and decided that if people received a small bill from the IRS, they’d just pay it and this would help balance the budget. A number of these bills by legend went out and were paid, but one citizen called and asked for a calculation. After much frustration, the discovery was that there no calculation and the bill was rescinded. The story goes that no one knows how many of those fake bills really went out. So, if you don’t understand a bill from the IRS call them and get a description of the reason for the bill. 9 out of 10 times it is correct. So, after you get the bill, and determine if its correct, what should you do. If they sent you a bill because you did not file a return, prepare a return and file it with correct information. Then wait tor the revised bill. Either way, if a bill comes, DON’T IGNORE IT. The IRS will not go away simply because you put your head in the sand, they will continue to seek payment. Your first option is to start making monthly payments to them voluntarily without a plan. Many times collections will not attempt sterner actions if they see a steady payment coming in. Another is to set up a payment plan with them. If you do that, you’ll find that they will actually leave you alone for a couple of years. If you are cash strapped and can’t even afford a payment plan, then you can ask them to put you in the currently non-collectible category. Normally this is not granted unless you are retired or living on a fixed income and your expenses reasonable and your assets near zero. Lastly, you can make an Offer in Compromise. They are difficult to get approved. We’ll talk about those.