IRS Updates


I think it might be appropriate to rename this column “IRS UPDATES” since it seems that all I have done for the past few issues is to provide commentary on what is happening with regard to the Internal Revenue Service. At least for the foreseeable future, I will try to keep you up to date on information you may have missed that could impact you and your tax situation.

Unfortunately, it seems that “service” has been pushed further to the back burner. This is in part due to budget restrictions and in part to the ever-increasing needs for revenue on the part of the government (so the IRS spends its budget money on enforcement and not so much on service). For the fiscal year just ended, its budget was reduced by over $600 million dollars. As a result, the number of audits was reduced by some 5% and collection activities decreased by about 33%. To make matters worse, Congress has also saddled the IRS with the responsibility to “police” Obamacare (ACA), BUT did not increase its current operating budget so that it could respond to the increased duties – even though the IRS requested an increase of $430 million to implement the ACA. (Yes, there was a significant budget increase several years ago, when ACA first passed, but those dollars were allocated primarily to modernize its computer systems.) The House of Representatives has voted to cut IRS funding be $341 million for 2015. The Senate has proposed to increase it by $240 million, but even that increase would place the budget at 7% below 2010 funding levels.

This might sound like good news on the surface. However, it has caused a dramatic reduction in the amount of tax dollars collected, meaning the government has to borrow even more in order to keep operating. My firm belief is that ALL honest citizens should be concerned when the IRS cannot keep up. We have a voluntary tax system in this country, meaning that those of us who obey the law provide honest information on our tax returns and pay the amount that we are legally obligated to pay. Tax cheats, of all stripes, are harmful to all of us honest citizens because they don’t pay their fair share. When the IRS is not able to do enough audits to catch the cheaters, it not only reduces tax revenues, but it has the additional deleterious effect of increasing the number of tax cheaters. When people see that the IRS has dramatically reduced its enforcement and collection activities, the natural result is that more people are encouraged to cheat.

Quoting from a recent Center on Budget and Policy Priorities article: “The IRS plays a crucial role in our system of government — helping taxpayers comply with the tax code and ensuring that the nation’s tax laws are enforced fairly and credibly — and policymakers should give it the funds needed to do those jobs effectively.  And from a fiscal perspective, starving the IRS makes no sense, as the return on the investment is high.  Each additional $1 spent on IRS enforcement yields $6 of additional revenue from collecting taxes owed under current law, according to the Treasury Department.  Cuts in IRS enforcement funding are increasing the budget deficit.”

There are other unfortunate results. About two weeks ago, IRS Commissioner John Koskinen warned that the upcoming 2015 tax filing season was likely to be “miserable.” He indicated that IRS phone service (at an “unacceptable” level or 72% during the last filing season) was likely to fall to 53% with an average hold time of 34 minutes. Koskinen’s remarks followed National Taxpayer Advocate Nina Olson who was even gloomier: “The filing season is going to be the worst filing season since I’ve been the National Taxpayer Advocate (in 2001). I’d love to be proved wrong, but I think it will rival the 1985 filing season when returns disappeared.” These are dire predictions that will affect every citizen who files a tax return.

As a professional who represents taxpayers who have IRS problems, I can attest to the fact that we are also feeling the pain. There is a phone number provided for us professionals to help us get through without having to wait in line. In the past we could usually count on speaking with an IRS representative within a matter of a few minutes. Now these wait times frequently last longer than an hour, sometimes much longer. Since most of us charge by the hour (or at least base our fees on the amount of time it takes) it is not difficult to see that costs of helping people with IRS problems must increase.

Many of you are aware that Congress has once again dragged its feet on the so called tax “extenders.” This term refers to tax breaks that have been part of the law for years (sometimes for decades) but have been allowed, as usual, to expire. For the past several years Congress has approved extension of the beneficial provisions. Sometimes the extensions are approved prior to the end of the years, but or late, they have not been approved until the next year when they are approved retroactively. OF course, tax planning and making the right moves in this climate is virtually impossible. We all hope and anticipate that many of these provisions will, in fact, be extended, but probably not until after the beginning of next year. The unfortunate result could be that taxpayers who relied on the hope of the extensions could have a rude awaking and a MUCH larger tax bill, if the provision they depended upon is NOT extended. THANKS FOR NOTHING, CONGRESS.

Here are a few other items you should be aware of:

  • 19 states have received money from the Department of Labor. The purpose of these funds is to help the states enforce their unemployment compensation laws. When workers are inappropriately classified as independent contractors, not only does the employer not collect payroll taxes, it also does not pay unemployment compensation taxes – costing the states tax dollars. The important fact here is that the states and the IRS share this information. If an employer is caught misclassifying workers, both the IRS and the states will come after the employer for unpaid taxes. In some cases, this could put the employer out of business. We have discussed worker misclassification in this column in the past. This new approach, in which the states initiate the audit action, will only add to the misery of employers caught doing it wrong.
  • Social Security benefits are typically safe from creditors grabbing them. However, if you owe the IRS, a recent district court ruling has authorized the IRS to levy these benefits.
  • Another reason NOT to represent yourself in a tax audit – one IRS auditor admitted that ALL deductions, proof or no proof are “REQUIRED” to be denied. They are to send out “worst case” scenario audit reports once they figure out what the “worst case” scenario is. They will then make adjustments when (and IF) the taxpayer objects. Those of us who represent taxpayers in audits know how to get the best results for our clients. Don’t take the chance of being blind-sided by overly zealous IRS agents.

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