What does this mean for taxpayers who have resolution and representation needs?
Aubrey Corcoran, EA
Ever since President Biden signed the Inflation Reduction Act during the summer of 2022, there has been much talk about the $80 Billion dollars earmarked to fund the struggling Internal Revenue Service over the next ten years. As a tax practitioner, my ears perked up upon hearing this news. I also heard that these agents would be armed with weapons – this is alarming news, indeed. But when we understand the facts about the agency, the staffing struggles that have limited tax practitioners’ ability to serve clients, the long delays in processing tax returns and correspondence, the funding makes sense in that regard. This blog article addresses both the good news and the bad news related to the massive hiring and funding of the IRS through the Inflation Reduction Act.
Understaffed and Underperforming
The pandemic has certainly removed the word “Service” from the Internal Revenue Service, hasn’t it? During the past two years, the IRS has answered between 5 and 11% of it’s telephone calls. As of July 29, the agency reported 10.2 million unprocessed 2021 tax returns. Agents were working from home, and many agents chose to retire during the pandemic rather than work remotely.
An Aging IRS Workforce
The IRS is tasked with collecting revenue to fund our large federal government, and requires humans to function well. In a 2021 Congressional testimony from IRS Commissioner, Charles Rettig, the IRS predicts that it will lose 50,000 of its 80,000-member work force over the next five years. Here is the link to the hearing Congressional Hearing on IRS Funding, the testimony begins at the 39-minute mark. The hiring of 87,000 agents over the next decade will bring the staffing up to status quo.
An Increasing Tax Gap – The “Bad News”
Americans owe approximately $600 Billion dollars in unpaid taxes, a measure known as the Tax Gap, and Congress seeks to close it. Collection activity is made easier with computer matching: if reported income does not match 1099 or W-2 records, a CP2000 letter is automatically generated and mailed to taxpayers, followed by a bill. The IRS also has methods for discovering the underreported income of small businesses. Using unpublished algorithms, certain factors raise your chances of audit by increasing your Discriminate Function System score (DIF) which selects returns based on probability of error.
· High home mortgage interest deduction. IRS is looking to spot those deducting interest on more debt than permitted.
· Inconsistency with information returns. Use Form 8082 to explain differences with K-1s. In other cases, show the amount on the information return on a support schedule and back out the portion incorrectly reported and provide a brief explanation.
· High Schedule C income. IRS will seek to determine if all income is reported and if personal expenses are being deducted. Reduce the chances of audit with an S corporation or multi-member LLC.
· Significant business losses. IRS will be looking to see if the activity is a hobby or whether start-up expenses have been deducted rather than capitalized.
· High charitable contributions. IRS examines cash contributions inconsistent with an individual’s income as well as significant property donations which require a Form 8283
· “Tax sheltered” investments. The tax representations made to investors often do not hold up under scrutiny. The current focus is on syndicated conservation easements.
· Unusual items including disproportionately high numbers. Consider a brief explanation on a support schedule.
· Foreign bank accounts. Submit Form 8938 to IRS and the FBAR to Treasury as required
· Round numbers. Claiming an expense ending in “000” rather than “321” suggests the number was made up and can trigger a correspondence audit.
· Preparer under scrutiny. If you have a preparer who is under investigation, it is more likely that your return will be audited by the IRS. Use a reputable preparer and, for a complex return, an enrolled agent, attorney or CPA.
While the risk of audit is still very low, if you receive an examination letter, it is most likely to be a correspondence audit letter (a paper examination, or paper audit).
The correspondence audit is the least expensive method to uncover tax liability previously unreported. Yet even paper audits require manpower, and attrition has impacted the agency’s ability to audit and recover taxes from citizens. Between 2010 and 2019, chances of audit fell from 0.9% to 0.25%. In order to mitigate the growing tax gap, the extra funding from the Inflation Reduction Act will give the agency the ability to hire and train agents to pursue more audits, and collect more revenue. As the agency hires, should taxpayers (and non-taxpayers) be worried? Will armed agents appear at their door?
IRS Agents Making House (and Business) Appearances – Field audits vs Criminal Activities
The IRS is certainly expanding its Criminal Investigation and Law Enforcement personnel, but should law abiding citizens be concerned? Take a look at the job description Special Agent Job Listing– these special agents are authorized to carry weapons and use force if required to defend themselves, as other law enforcement officers are authorized to do. These government agents are investigating criminal elements, those who commit identity theft, abusive tax schemes, cyber crimes, money laundering, illegal drug manufacturing and narcotics distribution. For a full report of the types of investigations see the 2021 report here:https://www.jobs.irs.gov/sites/default/files/wysiwyg-uploads/files/2021_Annual_Report.pdf
Field audits are instances where an IRS agent will make an appearance at a home or business to verify the existence or validate a particular deduction, such as capitalized fixtures, business use of home, or inventory. A field audit will not be a surprise and should always involve a tax practitioner who represents the business or individual under audit.
A collections visit is another matter. Collections officers will stop by homes in order to intimidate taxpayers into compliance. The IRS is aware that this activity is upsetting and has published guidance on its website concerning in person visits from collections officers:
“The IRS initiates most contacts through regular mail delivered by the United States Postal Service.
However, there are circumstances in which the IRS will call or come to a home or business. These include when a taxpayer has an overdue tax bill, a delinquent (unfiled) tax return or has not made an employment tax deposit. An IRS employee may also view assets or tour a business as part of a collection investigation, an audit or an ongoing criminal investigation.
Even then, taxpayers will generally first receive several letters (called “notices”) from the IRS in the mail.”
It is safe to assume that if you are in collections and not in an installment agreement, and have received multiple collection notices, and are not communicating or responding to these notices, the IRS may send an officer to your employer or your home to begin collections activities. An increase in funding means that there will be more officers available to make in-person visits to employers and homes.
Remember, the tax was owed to the U.S. government regardless of whether or not the officer made a visit. Now the funding is in place to escalate collections activities to close the tax gap. Now the government has authorization to hire more agents to seize your assets, freeze your bank accounts, garnish your paychecks, place liens on your property, and generally make your life miserable until you pay!
If you are receiving collections notices from the IRS, the worst mistake you can make is to do nothing. The notices have a certain number of days to respond, and you have rights to collections due process hearings if you respond in a timely manner. If you have questions or concerns, call Heritage Tax Representation and Services at (513) 900-9513 or visit our website at https://www.heritageincometax.com