If you receive an email purporting to come from the Internal Revenue Service, chances are it's a scam. The IRS never initiates contact with taxpayers via email. And even dealing with the IRS as frequently as I do, I have never dealt with the IRS via email concerning clients' tax issues.

Here's a copy of an email floating around right now that was forwarded to me by a client. I'll paste the email verbatim, and point out all the tell-tale signs of why this email is a scam in boldface.

------ Forwarded Message
From: Internal Revenue Service (irs@tax.com)
Reply-To: (irs@tax.com)
Date: Mon, 6 Jul 2009 16:30:44 -0700
Subject: Tax Notification

Document
Tax Notification
............................................................................................................

We are pleased to inform you that upon review of your fiscal activity we have determined that you are eligible to receive a tax refund of $246.30 under section 501 (c) (3) of the Internal Revenue Code. Please submit the tax refund request and allow us 3-6 days in order to process it.

To get your refund, please access the IRS e-file form.

IRS e-file form (http://tradef.static.otenet.gr)

............................................................................................................

Note: For security reasons, we will record your ip-address, the date and time. Deliberate wrong inputs are criminally pursued and indicted.

Note: Because this letter could help resolve any questions regarding your exempt status, you should keep it in your permanent records.

David Morgan
Director, Tax Refunds Department

------ End of Forwarded Message

The mistakes?

1. The IRS Web domain is irs.gov.
2. Sometimes spammers will spoof the "from" address and then use a different "reply-to" address. Although here, the addresses are the same
3. The refund amount includes cents. Refunds are usually in whole dollars.
4. Section 501(c)(3) of the tax code refers to tax-exempt organizations, so this is not relevant to refund for an individual taxpayer.
5. The URL address for the e-file form goes to a site other than irs.gov, in this case it points to a server in Greece.

In short, refunds can be requested from the IRS only by submitting a tax return. Returns can be e-filed only through authorized e-file providers (which means through a tax professional's office or through tax software packages). If you have questions about your refund, you can always call the IRS directly at 1-800-829-1040.

Related: Fake IRS Emails and Suspicious e-Mails and Identity Theft.

People often ask if the husband, or wife, can claim the other spouse as a dependent. The following scenario that was emailed to me pretty much outlines the basic situation:

"My husband is the only earning member & he supports all our expenses. For the tax year 2009 can my husband claim me & my children as dependants?"

Spouses are not dependents of each other. Instead, husbands and wives can choose either to file a joint tax return or to file two separate returns. Filing jointly provides you with two personal exemptions for the husband and wife, plus one personal exemption for each dependent. Filing jointly also provides a standard deduction of $11,400 for 2009. You can also itemize, if that figure will be higher than your standard deduction.

How do all these numbers work together? These standardized about are tax deductions you can take, which reduce your income before any tax is calculated. Or to phrase it another way, these deductions create a zero-percent tax bracket for you. For a married couple with no dependents, their first $18,700 of income is tax free. After that, their income would start being taxed using various tax rates.

Generally, taxes are lower when filing jointly, as the tax brackets are much wider (thereby allowing more income to be taxed at lower rates) and joint filers are eligible for a wider range of tax deductions and credits.

Cell phones provided to employees may soon be a tax-free transaction, if the IRS gets it's way. Doug Shulman, the Commissioner of the IRS, is urging Congress "to make clear that there will be no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers." This statement came just eight days after the IRS asked for public comment on how to simplify record keeping relating to the personal use of mobile phones. Under current tax laws, cell phone use must be allocated between personal and business use. Any personal use of a cell phone service paid for by the employer is considered taxable income to the employee. "Because it is up to Congress to set the laws that the IRS must follow and enforce," explains AccountingWeb, we'll have to see if Congress changes this particular law.

More information about: deducting cell phone service and listed property.

The Electronic Tax Administration Advisory Committee, a fourteen-member panel that advises the IRS, has presented its 2009 annual report to Congress (pdf file, 27 pages). In their report, the committee recommends ten improvements to the Internal Revenue Service's electronic filing programs. Among their recommendations: require tax professionals to e-file, developing standards for tax software programs, and continuing the Free File Alliance for providing online tax preparation without cost to the taxpayer.

The problem that the IRS faces is getting at least 80% of tax returns to be submitted electronically. This 80% goal was mandated by Congress as part of the Restructuring and Reform Act of 1998. The 80% goal was supposed to be achieved by 2007. It hasn't happened. For 2009, the committee estimates that 59% of all tax returns were e-filed. For personal tax returns (Form 1040 and related forms), 69% were e-filed.

There are numerous advantages and disadvantages with e-file. Certainly, e-filing a return speeds up processing times, so taxpayers get the refunds quicker from the IRS. But most of the benefits are on the government side: they don't have to hire people to transcribe the tax forms into their computer databases. The disadvantage of e-file is that some tax returns simply cannot be filed electronically at all. And e-file requires using software to prepare and transmit the return, and using software is simply a very different process than filling out a paper form.

The committee highlighted security concerns in their report, and this particularly caught my attention. They claim existing IRS security protocols "does not set sufficiently clear security standards to protect taxpayer information" (page 22). With the massive amount of tax return information being collected, stored and transmitted to the IRS, one has to wonder why stricter security protocols haven't been adopted sooner, and to what extent the committee thinks taxpayer data is in jeopardy?

The report does not mention anything about the IRS developing its own tax software application so that people could file directly on the IRS Web site. Many states already allow direct filing. California has even gone one step further with its ReadyReturn program, in which the government has pre-populated tax forms with data culled from W-2s, and all the taxpayer has to do is log in, review the return, make changes, and file. I would think the IRS would have the resources to develop something similar.

Updated 6/25/2009 due to a second set of frequently asked questions published by the IRS.

The Internal Revenue Service is in the middle of a crackdown on US citizens who haven't filed foreign bank account reports in the past and who haven't reported income earned in those accounts. Here's a common situation that people have found themselves in that's reflective of the sort of questions I've been getting lately:

"Both my wife and I gain the status of USA permanent residents in July 2006. Prior to that we lived in another country (Romania) and we still are Romanian citizens. When we moved here in USA (as I said, in July 2006) we still left some of our money in a Romanian bank account(s). And now the question(s): Do I have to declare these accounts? Should I fill & file a TD F 90-22.1 form for this? Do I have to declare the interest? I should say that in Romania the 'federal tax' in subtracted automatically from the interest, so you as a person do not have to worry anymore about declaring it. As a result, I already paid taxes to Romania government for that money."

The IRS has instituted a voluntary disclosure program for situations like these. Here's what we know about the program so far. Read more...

The federal government might give you cash to trade in your existing car or truck for a newer, more fuel-efficient vehicle. The Consumer Assistance to Recycle and Save Act (part of H.R. 2346 which has been passed by Congress and is headed to the Whitehouse for the President's signature). This is not a tax credit or a tax deduction, but it is money from the government.

Under this program, the National Highway Traffic Safety Administration will issue vouchers to be used to offset the purchase of a new car. The vouchers are worth up to $3,500 if the new car has a fuel-efficiency rating at least 4 miles per gallon higher than the old car traded in. The voucher jumps to $4,500 if the new car is at least 10 miles per gallon more efficient than the old car. There's different fuel-efficiency guidelines for trucks. (See below.) Purchases need to be made between July 1, 2009, and November 1, 2009, to qualify for the vouchers.

The tax impact? Here's the part I like best. The payment vouchers will not be considered taxable income for the car buyer.

In addition, car buyers are eligible to deduct the full cost of sales taxes paid on the purchase of a new car. This vehicle sales tax deduction is available for purchases made after February 16, 2009, and before January 1, 2010. Also, there's still some tax credits available for hybrid and other fuel-efficient cars. Read more...

Americans who have financial accounts in other countries need to file a special foreign bank account report with the US Treasury Department by June 30, 2009. Both individuals and businesses may need to file this report.

This particular form has been substantially revised. Specifically, the Treasury now wants to know the exact amount hold in foreign accounts, the full address of the bank where the account is held, and has expanded the definition of a foreign account to include pre-paid credit and debit cards.

I previously alerted readers to a very good summary of the revised foreign bank account report from PricewaterhouseCoopers. I also wish to alert readers to a rather comprehensive article by Michael Miller from the International Tax Journal that covers in detail all ins-and-outs of the revised foreign bank account report, including under what circumstances penalties could be imposed. The article can be accessed at: Anti-Deferral and Anti-Tax Avoidance: The New FBAR is Here (pdf, 6 pages).

June 15, 2009, is the deadline for a number of tax filings and payments.

Estimated payments are due for the second quarter.

Individuals living abroad need to file their tax returns and pay any balance owed on their 2008 tax return. If you work overseas, you'll probably qualify for the foreign earned income exclusion or the foreign tax credit. If you need extra time beyond June 15th, you can file an extension using Form 4868. And if you need extra time so you can qualify for the exclusion, use Form 2350 (pdf, 3 pages).

Obama has appointed Paul Volcker to head a panel that will make recommendations for reforming our nation's tax laws. Volcker is also the head of the President's Economic Recovery Advisory Board.

The advisory panel will consider ways to simplify the tax code and reduce tax evasion, and will make recommendations to the President by December 4th, 2009, according to a White House briefing.

The last time we had any serious consideration for tax reform was in 2005 when President Bush appointed a panel of advisors to come up with simplified tax systems. Those recommendations were never implemented. There is a strong suspicion that recommendations coming out of this new tax reform panel might not fare any better. Rosanne Altshuler, who worked as the chief economist on the 2005 panel, fears that Paul Volcker and his team might be too constrained,

"President Obama has said that no one making less than $250,000 could pay higher taxes under any new reform. That means ninety-five percent of taxpayers can’t pay additional tax, even if it would result in a more efficient system, decrease inequities, or make their lives much simpler. At a time of monster deficits, that pretty much rules out any sensible reforms." Tax Reform 2.0 (TaxVox blog)

There's no sign of any Web site where we can see what's going on with this advisory panel. The Web site for the 2005 panel, located at www.taxreformpanel.gov, has been removed. Perhaps it will be resurrected for the new panel? I also hope the panel solicits recommendations from the public and holds meetings. This would gives all of us a chance to voice our ideas for tax reform.

More resources:

Presidential tax panel, take 2 (Don't Mess With Taxes)

Tax Policy and Reform Briefing Book (Tax Policy Center)

Profile of Paul Volcker (About.com)

Time For A Tax Reform (opinion, from Forbes.com)

Doug Shulman, the current commissioner of the Internal Revenue Service, plans to make recommendations for regulating tax preparers. Normally, a plan to make recommendations isn't by itself newsworthy. But with our tax laws in the midst of undergoing change, it does makes sense for the government to reconsider the role that tax professionals and tax software plays in our economy.

The IRS plans to hold public meetings, with schedules and agenda topics to be posted on the IRS's tax professionals page.

Current Regulations

Different types of tax professionals are subject to varying federal and state laws. Tax attorneys, certified public accountants, and enrolled agents are subject to the rules laid out in Treasury Circular 230. Among other things, these tax professionals must file and pay their taxes, must not charge unconscionable fees, and must be diligent in providing accurate tax returns. The rules also prevent a tax professional from cashing or negotiating a client's tax refund, notarizing their own tax returns, and keeping client's original documents in the case of a fee dispute.

Attorneys and certified public accountants are also subject to regulations in the state or states where they are registered.

Other tax preparers who do not have one of these professional licenses may be subject to state laws. California and Oregon require tax preparers to be trained and licensed before they can provide services for a fee. Maryland will require tax preparers to be licensed by June 2010.

Do We Need More Regulations?

The IRS seems to think so. "At the end the day, tax preparers and the associated industry must be part of our overall game plan to strengthen the integrity of the tax system," said Commissioner Shulman. An August 2008 report by the Government Accountability Office would seem to support the need for greater regulation. The GAO compared tax returns from Oregon to the rest of the nation, and found that "the average Oregon return required approximately $250 less of a change in tax liability [upon audit] than the average return in the rest of the country."

Preparing accurate returns is not the only problem that tax professionals and our legislators face. Regulations, if adopted, should clearly define what tax preparers are -- and are not -- responsible for. Consider the following situations:

• Who should pay penalties when a tax return has a mistake?
• Where will complains against tax preparers be lodged?
• Could taxpayers verify a tax preparer's license on the IRS Web site?
• Should tax preparers be prevented from selling tax refund loans? Or investments? Or other financial services?
• Should tax software be tested to ensure it's compliant with the tax laws?
• Should the people who develop tax software be licensed too?
• What types of tax professionals should be allowed to represent clients in an audit?
• Should we continue to allow states to issue their own regulations, or do we really need the feds to step in?

What's your opinion? Should all tax preparers be licensed? Or is there a better way to handle unprofessional preparers?

More information:

• IRS to Close Tax Gap by Licensing Tax Preparers (from the TaxProf Blog)
• IRS may seek licenses for tax preparers (AP via Baltimore Sun)
• Should tax preparers be licensed? IRS considering it (from CPA Success)