IRS into 2014


Two weeks ago I attended the annual conference of Tax Freedom Institute, an organization of a few dozen of the top minds in America when it comes to helping taxpayers deal with IRS problems, be they audits, collections or myriad other issues. The first session always deals with an overview of what we can reasonably expect the IRS to concentrate on for the foreseeable future.

Because there has been no real budget in Washington for the past several years and because of sequestration, funding for the IRS has actually been cut by about $1 billion since 2010. Fulltime staff has been cut by over 2000 people since 2011 and the staff training budget has been cut by over 62%. Add to that the fact that many of the senior staff are nearing retirement or have become disillusioned because of the recent IRS scandals and are looking to move out of government and we are looking at an IRS that will be increasingly difficult to deal with. Of particular concern to us are the loss of senior staff and the lack of training for new staff. When we are working to resolve tax issues, one thing we have been able to count on, at least a fair part of the time is that the IRS employee(s) we need to work with are knowledgeable. The all-important traits needed in IRS personnel are: background, training, education, experience and intuition.  When these people lack the knowledge of tax law (remember, the Internal Revenue Code is now about 4 million words long), not to mention all of the other rules, regulations, promulgations, tax court cases and the like, in order for us to get the best results for our clients we must first attempt to educate them. Of course this takes time on our part – and time is always money. I suspect any person who advocates on behalf of taxpayers against the IRS will find it necessary to increase fees in order to stay in business. This does not bode well for the taxpayer.

I would also observe that the significant complexity added because of Obamacare and other tax law changes will also force preparation fees higher. Right now 80% of our fellow citizens use a third party preparer – double that of ten years ago. It is estimated that 7.6 billion hours are spent annually preparing the necessary information and filing returns. This is equivalent to 3.8 million full-time workers. The cost of this compliance is $193 billion which is equal to about 14% of taxes collected. These figures do not include the cost of enforcement, such as audits and IRS collection efforts. All by itself, these statistics make a pretty strong case for MAJOR overhaul of our tax system.

Of course the terrific complexity of the tax code affects how citizens comply with the law because it is so confusing. This confusion leads to misunderstanding and, thus, to non-compliance. In the vast majority of cases, people end up having problems with the IRS not because they wish to be tax cheats, but rather because they can’t understand what is required of them. To make matters worse, this situation creates an impression of unfairness, which, all by itself will cause some citizens not to comply.

However, rather than concentrate on helping the public understand what they need to do to comply, the IRS is concentrating more on enforcement than it has in the past decade and a half.

At present the IRS is concentrating on the following programs:

  • Offshore tax evasion
  • New information reporting requirements for credit card merchant payments
  • Employment tax enforcement, including employment tax non-filers, fringe benefits that the IRS believes should be treated as wages, and officer compensation from corporations
  • Increased audits of partnerships and S-corporations
  • Implementation of Obamacare
  • Increasing focus on “high-wealth” individuals

So let’s take a quick look at the 2014 budget requested by the IRS:

  • They request $13.358 billion, a 6% increase
  • They hope to increase staff size to 97,300 people, and increase of 3.75%
  • They expect to spend $5.667 billion on enforcement, even though 98% of all tax dollars collected are paid voluntarily
  • Operational support will be $4.481 billion
  • Leaving a mere $2.412 billion for taxpayer service – this while the IRS is answering only 68% of 115 million phone calls (and then keeping the calls that WERE answered on hold for an average of 17 minutes). In addition the IRS received 10 million written responses to their correspondence audits (the ones that tell you that you did not include all of your income) and it receives 370 million hits to its web site. Without question the IRS and all of society would be better served if “Service” was stress by way of educating, outreach and assistance, rather than enforcement.

What about the person likely to be the new IRS commissioner? At this writing it looks as though it will probably be John Koskinen, who was nominated by the president in early August. He is NOT a tax guy, which COULD be good news. However, he was Chairman of Freddy Mac from 2008 to 2011 and its acting CEO in 2009. I wouldn’t blame you if you came to the conclusion that this might not be the strongest recommendation, given the horror stories coming out of that organization in recent years. He was President of the U. S. Soccer Foundation from 2004-2008 (another questionable recommendation). From 2000-2003 he was Deputy Mayor of Washington D. C. and its City Administrator. Those of you with close ties to that city might be better able to comment on that background better than I. He has also held other private sector jobs, which MIGHT actually be a plus. So what is the bottom line on the prospective new IRS commissioner – our best answer is “Who knows?” We’ll just have to wait and see.  In the meantime expect the IRS to be even more involved in enforcement rather than in “Service”. By the way, we have no reason to suggest to you that the rumors about the IRS hiring 16,500 new agents to enforce Obamacare are true. It appears that they are asking for “only” 5700 new employees across the board.

One other thing you might wish to consider. Go to our web site and sign up for our newsletter. Given everything that is happening and what is in the wind, I plan to be much more active in writing updates that will attempt to keep you informed on things that could help you in your dealing with tax matters. Once you have joined you will be notified by email when a new posting has been made. Regardless of all of this, we wish you a Happy and Prosperous New Year.

Remember our business motto: We defend our fellow citizens against their government by making sure the IRS obeys the rules.