IRS Faces Tough Test with Tax Reform
IRS Faces Tough Test with Tax Reform
On January 10th, the Taxpayer Advocate, made her annual report to Congress. The Taxpayer Advocate is an actual person. Her name is Nina E. Olson, and she's been the Taxpayer Advocate since March of 2001. She heads up the office of the Taxpayer Advocate, which is charged with:
- Assisting taxpayers in resolving problems with the Internal Revenue Service,
- Identifying areas in which taxpayers have problems in dealings with the Internal Revenue Service,
- Proposing changes in the administrative practices of the Internal Revenue Service to mitigate problems, and
- Identifying potential legislative changes which may be appropriate to mitigate such problems.
The Taxpayer Advocate is also required to provide an annual report directly to Congress. This is a report which, by statute, is unfiltered by the IRS itself. It is made, "Without any prior review or comment from the Commissioner, the Secretary of the Treasury, any other officer or employee of the Department of the Treasury, or the Office of Management and Budget."
Over the last few years, this report has identified major problems at the IRS, including identity theft security issues, poor IRS service of taxpayers, unrealistic audits, and aggressive collection efforts against some of the poorest households in the nation. The IRS Commissioner is required to respond to the recommendations in the report within 30 days.
You can read the full report, or just highlights here.
In discussing the present state of the IRS, Ms. Olson writes, "In recent weeks, there has been considerable discussion about how the IRS has been beaten down by continuing funding cuts and about concerns the agency is stretched so thin it will not be able to properly implement tax reform." The funding for the IRS is a very real issue. Over the last several years, spanning both Republican and Democrat administrations, it's been popular to give the IRS more to do (Affordable Care Act, Tax Reform), while cutting funding.
The New York Times wrote on Dec. 29th, "Pounding a perennial punching bag like the I.R.S. scores easy political points among Americans who associate the agency with an unpleasant April deadline. We get it. But if the agency that collects more than 90 percent of the government’s money stumbles, all Americans pay, and they can look to Congress, not just the I.R.S., in assigning the blame."
Some of those funding cuts have resulted in awful service to taxpayers. Ms. Olson reports, "I see daily the consequences of reduced funding of the IRS and the choices made by the agency in the face of these funding constraints. These impacts are real and affect everything the IRS does. Funding cuts have rendered the IRS unable to provide acceptable levels of taxpayer service, unable to upgrade its technology to improve its efficiency and effectiveness, and unable to maintain compliance programs that both promote compliance and protect taxpayer rights. “Shortcuts” have become the norm, and “shortcuts” are incompatible with high-quality tax administration. There is no doubt that the IRS needs more funding."
However, Ms. Olson is careful not to blame funding cuts for all IRS shortcomings. "At the same time, limited resources cannot be used as an all-purpose excuse for mediocrity. There is not a day that goes by inside the agency when someone proposes a good idea only to be told, 'We don’t have the resources.' In the private and nonprofit sectors, saying 'we don’t have the resources' is the beginning of the discussion, not the end. Yet with the IRS, lack of resources often has become a reflexive excuse for not doing something, or worse, for doing things 'to save resources' that harm taxpayers, foster noncompliance, and undermine taxpayer and employee morale."
There are certainly major issues with the IRS. So, what are they?
POOR TO NON-EXISTENT TELEPHONE SERVICE
A recurring theme for the past several years remains an issue in this year's report. During normal tax years, the IRS receives over 95 million calls a year, but expects to only provide a "live assistor", i.e. a real person to assist LESS THAN 40% of callers. That means that MORE THAN 60% of callers don't ever talk to a human being about their questions. Those that do get through report that they often did not get their question resolved. The Taxpayer Advocate reports, "Because of the IRS’s archaic telephone technology and operations, taxpayers face long wait times with the worry that the IRS’s telephone assistors will not be able to answer their questions if they are able to get through. Failing to provide high quality service to taxpayers over the phone has the potential to reduce voluntary compliance, which can place an unnecessary burden on the compliance functions of the IRS in the future. "
Part of the problem the IRS has in simply answering the phone is due to the lack of qualified employees working for the IRS. The IRS has lost about 20,000 full-time staffers since 2010. IRS staffing in key taxpayer-facing positions has declined precipitously since 2011, and the IRS has reduced its employee training budget by nearly 75 percent since 2009. So, there are fewer IRS employees, and the ones that remain are not trained nearly as well as in previous years. Our firm can testify of the declining quality of the interactions we have as professionals with the IRS, and we're treated to a Practicioner Priority Line that doesn't experience the same hold times and inexperienced/undertrained staff the general public has to deal with.
The charts below show (1) how the numbers of employees in every service channel have gone down since 2011, and (2) how drastically the IRS training budget has decreased over the last 8 years.
PROBLEMS ADOPTING ONLINE ACCOUNTS
Because of budget cuts and fewer taxpayer-facing positions, the IRS has increasingly pushed taxpayers to create online accounts. With approximately 41 million U.S. taxpayers without broadband at home and almost 14 million with no internet access at all at home, online accounts simply aren't a reality for a large portion of the population. Of those that do make it online to create an IRS account, only about 30% are able to do so.
In addition, many are leery of these online accounts as these accounts have been repeatedly hacked. One investigation in 2016 reported approximately 700,000 hacked accounts.
CUTS TO TAXPAYER ASSISTANCE CENTERS (TACs)
Taxpayer Assistance Centers, formerly called walk-in sites, became the primary local face of the IRS after it reorganized. Recent changes to TACs have chipped away at the services provided and the ability of taxpayers to receive prompt, in-person service.
As the IRS moves towards online self-service it must consider taxpayers who cannot complete tasks online or prefer not to use the internet for interacting with the IRS. The strategy of reducing a service to the point that taxpayers can no longer easily access it, then declaring no one uses the service and eliminating it entirely has proven successful for the IRS in the past, and it appears the IRS is moving in the same direction with TACs.
To anyone that has tried to go in person to one of these sites recently, the IRS strategy of eliminating these walk-in sites is very evident. Hodge-podge schedules, barricaded doors that seem more prison than service office, and posters outlining the long list of services that are NOT provided are a stark contrast to any service in the private sector seeking to accommodate clients.
THIRD PARTY ASSISTANCE QUALITY AND PRICE
What are taxpayers that are unable to create online accounts (70%+ of those that even try), or get through on the phone (60%+) supposed to do to comply with our "voluntary" tax system? How many hours will they spend trying to resolve their questions? Taxpayers seek tax assistance from a variety of tax sources — which may be licensed professionals (e.g., attorneys, certified public accountants, or Enrolled Agents) or unregulated persons or just random internet sites. The quality of the assistance varies wildly and it is not free. Thus, because the IRS doesn’t provide quality service to the average taxpayer, he or she must pay for it. This increases the individual burden of tax compliance.
It is difficult for us to charge our clients for tax resolutions that should be clearcut and timely. We end up writing off hundreds of hours of time each year. But what we do charge is a burden that the compliant taxpayer shouldn't have to pay. While we're eating time, and not billing the majority of it, we've seen third-party tax debt resolution services flourish. Just turn on the radio or the television, or bump into an ad-filled site online, and you're bombarded with ads targeted at those seeking for tax debt relief.
The IRS currently receives more than 150 million federal income tax returns every year, and the majority are prepared by paid tax return preparers. For that reason, both taxpayers and the tax system depend heavily on the ability of preparers to prepare accurate tax returns. Current law imposes no competency or licensing requirements on tax return preparers. Attorneys, certified public accountants (CPAs), and enrolled agents are required to take courses and pass competency tests. Volunteers are required to pass competency tests in order to prepare returns as part of the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs. But the majority of preparers are non-credentialed.
Numerous studies have found that non-credentialed tax return preparers routinely prepare inaccurate returns, which has the effect of harming taxpayers, the public, or both. To protect the public, federal and state laws generally require attorneys, doctors, financial planners, actuaries, appraisers, contractors, motor vehicle operators, and even barbers and beauticians to obtain licenses or certifications, and in most cases, they are required to pass a competency test first. Taxpayers and the tax system would benefit from requiring minimum standards of tax return preparers as well.
The Taxpayer Advocate recommends that the IRS be authorized to establish minimum competency standards for Federal tax return preparers.
Our firm is in favor of requiring credentialed tax preparers. In our firm's case, we often charge less or as much as non-credentialed preparers, especially the gimmicky tax debt service hotlines, yet have credentials with the highest certifications in the accounting world. (See average fees here.)
Other, serious problems identified by the Taxpayer Advocate include the following:
PRIVATE DEBT COLLECTION: The IRS’s Private Debt Collection Program Is Not Generating Net Revenues, Appears to Have Been Implemented Inconsistently with the Law, and Burdens Taxpayers Experiencing Economic Hardship.
AUDIT RATES: The IRS Is Conducting Significant Types and Amounts of Compliance Activities that It Does Not Deem to Be Traditional Audits, Thereby Underreporting the Extent of Its Compliance Activity and Return on Investment, and Circumventing Taxpayer Protections
TAXPAYER RIGHTS: The IRS Does Not Effectively Evaluate and Measure its Adherence to the Taxpayer’s Right to a Fair and Just Tax System
FRAUD DETECTION: The IRS Has Made Improvements to Its Fraud Detection Systems, But a Significant Number of Legitimate Taxpayer Returns Are Still Being Improperly Selected by These Systems, Resulting in Refund Delays
REFUND ANTICIPATION LOANS: Increased Demand for Refund Anticipation Loans Coincides with Delays in the Issuance of Refunds. Demand for refund anticipation loans (RALs) has more than tripled over the past year. Over 90 percent of the returns filed with RAL indicators were filed by February 15. This substantial increase in demand coincides with the act that requires the IRS to hold all refunds that include Earned Income Tax Credit and Additional Child Tax Credit until February 15. Such delay in refund issuance improves tax administration, but taxpayers are absorbing the costs of these short-term loans and, in many cases, they might not even realize the true cost due to the hidden nature of the indirect fees.
Tax Reform's Impact on the IRS
With so many issues already on the table before Congress passed the Tax Cuts and Jobs Act, how can the IRS hope to improve service to taxpayers? Tax reform passed in late 2017, the tax agency needs to update forms, create new definitions, write regulations and field questions from taxpayers, which tend to increase when Congress passes new laws - all while trying to address the normal 2017 tax year income tax filing season. To compound the issue, The IRS currently lacks a full-time commissioner and a permanent chief counsel, or top lawyer. Those are the only two politically appointed positions at the agency. President Donald Trump hasn’t nominated anyone to succeed IRS commissioner John Koskinen, whose term expired in November, or former chief counsel William Wilkins, who left in January 2017. David Kautter, who is also the Treasury Department’s top tax policy official, is serving as acting IRS commissioner.
After the last major tax reform in 1986, call volume to the IRS increased by 14 percent. After the Affordable Care Act passed, call volume jumped by 8 percent in 2011, then 18 percent in 2012. In 2008, after Congress authorized Economic Stimulus payments, the IRS was deluged with an increase of over 125 percent in taxpayer phone calls. As taxpayers seek to understand the new law, the IRS is sure to experience higher call volume. When they can't even answer 40% of the calls that are now coming, it's unrealistic to expect that the majority of taxpayer's will have their questions about the new bill answered by the IRS. The IRS will attempt to make announcements through its website, www.irs.gov, but as stated earlier, there are many without internet access, and written tax guidance is difficult to digest by the average taxpayer.
In addition, Congress left much of the tax reform legislation ambiguous or contradictory. It's up to the IRS to interpret Congressional intent and apply that intent to the nitty gritty details of the transactions of the everyday taxpayer. They will then publish regulations giving us guidance where Congress left important details unstated or unclear. The IRS has issued guidance on two issues, as of January 12:
- To deduct state and local taxes on your 2017 return, the tax had to be assessed and paid before 1/1/2018
- On 1/11/2018, they issued new withholding tables for payroll calculations to reflect the lowered tax rates, and informed employers that the new tables have to be in effect before February 15.
It's commendable that the IRS has issued guidance on these issues quickly, but there are far more complicated changes, especially for businesses, that will have to be addressed before taxpayers can act with any real certainty. This blunts the intended economic boost the reform is expected to provide.
The IRS estimates that it will need about $495 million in FYs 2018 and 2019 to implement Public Law 115-97, including programming and systems updates, answering taxpayer phone calls, drafting and publishing new forms and publications, revising regulations and issuing other guidance, training employees on the new law and guidance, and developing the systems capacity to verify compliance with new eligibility and documentation requirements. The IRS has identified 131 filing season systems that will be impacted by the new legislative provisions which, among other things, include incorporating new individual and business tax rates, gradual inflation indexing changes for deductions and credits, threshold changes repeal, removing existing credits from systems, and updating fraud detection filters.
President Trump had proposed a budget of $11 billion for the entire year, before tax reform was passed. The $495 million increase would be a 4.5% increase from President Trump's proposed budget. This increase would be a trend change, as the IRS budget declined 12.7% in constant dollars from its 2010 peak to fiscal 2016.
So, is Congress planning to increase funding to the IRS, so that they can handle the new bill while improving existing services? The Wall Street Journal reported that Rep. Kevin Brady (R., Texas), chairman of the House Ways and Means Committee, said he met with Treasury Secretary Steven Mnuchin this week about implementation and that the administration is trying to prioritize resources. “We just had a preliminary discussion about how best to address that,” Mr. Brady said. “I assume it will require some resource. We don’t know yet what…the timing need is for it.” The Wall Street Journal also quoted Sen. John Cornyn of Texas, the Senate’s second-ranking Republican. He said, “We need to reform the IRS...but I am concerned that they’re not able to do their job and not maintaining their information systems to protect personal financial data by taxpayers and the like.” He added that he doesn’t have “an arbitrary amount that I think should be spent.”
From these quotes it appears that Congress is still fuzzy on how to help the IRS help taxpayers.
Big picture, what does this mean for you?
What does this all mean for you? The IRS was already poor in serving taxpayer needs. Budget cuts and mismanagement have decimated services. There isn't an appointed leader to correct these problems, and no concrete plan by Congress to support financially the needs the Taxpayer Advocate has identified. That was all before the biggest tax change in 30 years. In the short-term, expect worsening services and expect to wait for clear IRS guidance on laws that affect you.
In this environment, taxpayers will go looking for help from third parties. Uncredentialed tax preparers, advertisers, and other companies seeking to make a quick buck off of the lack of guidance could prey on people just trying to do their level best to comply with the tax code while minimizing taxes.
Look to credentialed professionals that are required to keep up on the latest laws, have codes of ethical conduct they're required to follow, and that will not bill you indiscriminately for advice that may not be founded in any real IRS guidance.
The CPAs at Smith, Kunz would love to discuss how tax reform affects you and your family. We will outline what has, and what has not been clarified, and the moves you can make to save money. There are wonderful opportunities in the Act, but there are also landmines. Reach out to us today, while the IRS continues to reel, for all your tax needs.