Former Internal Revenue Service commissioner Mark W. Everson is worried about the impact of continuing budget cuts on his old agency’s ability to help taxpayers and tax practitioners this tax season as the IRS is encouraging taxpayers to check the IRS.gov Web site for answers to questions before picking up the phone.
“Anytime you’re cutting bodies, no matter how well you map things out on the online materials, there are a certain number of transactions that are going to require specific personal interaction, and many of those are very much subject to the availability of the employees of the Service to answer questions or chase down answers about a specific account, and that is a fact,” he said in an interview with Accounting Today last week. “There’s no doubt about it. The funding shortfall has already reduced services significantly, and that will most certainly reduce the enforcement revenues associated with the Service’s activities.”
Everson served as IRS commissioner from 2003 to 2007 and is now vice chairman of alliantgroup, a consulting firm that advises companies and CPA firms on tax credits and incentives. He has found that the cutbacks to the IRS’s budget make it harder for taxpayers and professionals to get through to the IRS.
“The real shame here is that a lot of the manpower has been devoted to addressing some of these extremely important issues like identity theft, the Affordable Care Act or the international arena,” he said. “All of that is appropriate. The Service doesn't have much of a choice there. They've got to do that, but what gets squeezed is the multitude of other responsibilities. That is unfortunate because the commissioner is to some degree forced to make some pretty hard choices here because you do get to a point where maintaining the structure to do certain things, it's just very hard once the funding falls below a certain level. You don’t get to pick, I always say, which laws you want to enforce if you’re running the IRS. It has to be seen as absolutely evenhanded in what it's doing, but it’s harder to at least touch all the areas you’re responsible for if the funding is as tight as it is.”
He faults Congress for not only cutting the IRS’s budget, but also for waiting until the last minute to pass legislation such as the tax extenders bill in December that extended expired tax breaks for only two additional weeks.
“The whole extenders exercise was quite disgraceful,” he said. “It's not good from the point of view of business owners who need to make investment and hiring decisions, to set up major provisions of the tax code, only to have them expire two weeks later. That's bad for business. It's bad for the economy. But it's also not good for the IRS either. The first thing I say is I give the Service very good grades the last few years for being able to discharge their responsibilities for the filing season because Congress hasn't been discharging theirs. It's just absolutely essential that we have a more orderly process for writing the tax laws and/or getting some stability in the code.”
Despite the last-minute passage of the tax extenders legislation, Everson anticipates the IRS will be able to cope with them, but he is concerned about the IRS’s ability to provide customer service and offer help to taxpayers such as identity theft victims.
“There's just been a general deterioration in service over the last few years, largely driven by the budget process,” he said. “So the filing season itself is more difficult in part because of the delayed action by Congress, but largely and most importantly because of the funding squeeze. On top of that you have the still very serious issues of identity theft. I’d give the Service again some pretty high marks for confronting this. It’s difficult to stay ahead of this issue because the criminals are constantly refining their techniques, trying to make sure that they are striking quickly and creating bank accounts and then moving on. But the net result of this is the deployment of several thousand people at the IRS to attend to this problem. The IRS is in a tough place. If you write your protocols in your computers too tight, what you do is you kick out and hold for additional scrutiny many totally legitimate returns. That's obviously quite frustrating for the taxpayer who has processed the return and is expecting to get back a refund deposited into his or her bank account in short order. If you draw your limits too widely, it's just an invitation for fraud and millions of dollars going out the door.”
ACA Compliance
The Affordable Care Act will add extra complexity for many taxpayers and practitioners this season.
“Everything I have seen on this is that the IRS has done a pretty good job, unlike other parts of the administration, getting the software ready, doing their bit of making sure they have devoted the right resources to it and developed the right technology, so that they can discharge their responsibilities on this,” said Everson. “This year, when they file, taxpayers are going to have to go through a process where they're cleaning up and reconciling their premium tax credit which they have been claiming as the year has gone along. That's going to be a difficult exercise for many, because about two-thirds of Americans don’t even itemize. And many of the people who are filing for that premium tax credit fall into that category so their interaction with the government is necessarily more complex and more confusing than it’s historically been for them. So I think that's going to gum up the works quite a bit and leave folks who try to do this on their own with some questions. Some of those can surface in the form of phone calls, which the Service has a hard time getting to. There are long wait times over there, and there could be increased frustration on the part of a large number of taxpayers.”
Everson believes both taxpayers and tax professionals are going to face challenges getting help with Affordable Care Act compliance. “There are two sorts of channels of service to bear in mind,” he said.
“One is for that average taxpayer, and it’s certainly going to be difficult and oftentimes frustrating for the average taxpayer to deal with that premium tax credit if he or she is claiming it. The other, frankly, that doesn’t get much conversation, is the channel for tax practitioners. Alliant works with firms all over the country, and I hear again and again the utter inability to get through on a reasonably prompt basis for practitioners. That causes frustration too. It results in a lot of double and triple mailing of different transactions on the part of the practitioner, and also on the part of the government, so it's not a pretty picture if you're looking at either channel. And I do think there's a risk of very high frustration developing over the course of the next six months.”
International Taxes
The IRS will have to deal with not only the Affordable Care Act, but also with the Foreign Account Tax Compliance Act, or FATCA. Everson expects to see the IRS step up enforcement on international taxes as a result.
“I think the Service will do its level best to make sure it’s doing an adequate amount in this international arena,” he said. “This all really started back in the period of time when I was in the Service. We developed information sharing with a series of countries because of tax avoidance transactions. If there's been one change, I've been struck by the fact that when FATCA was put in a lot of people said this won’t work because a lot of governments won't follow it. But it's been just the opposite. What's happened is there has been a steadily emerging consensus by all the governments that they need to do more in this area. This is another area where the IRS can't afford to back away. They'll have to do a credible job on this. That means the devotion of resources. They may not be able to do as much as they want to, but they're going to give it a pretty good shot.”
Everson is concerned about how the IRS will deal with the budget cuts, which the current IRS commissioner, John Koskinen, has warned could entail employee furloughs after the end of tax season. Everson is even more worried about the impact of the cuts on future hiring and training at the IRS.
“Well, one or two holidays is not the end of the world,” said Everson. “What’s more significant is the fact that for extended periods of time they're not able to hire and train new people to come in and carry the load. You need to maintain a healthy growth of the organization and be in a position to do the job it must do 10 or 20 years from now. You need to be bringing in people now and getting them the training and experience. You can’t just hold the organization in place as people retire or leave and then furlough a few folks and expect to have a competent workforce five or 10 years down the road. That's the greater concern in my mind.”
R&D Credit
Everson advises tax practitioners to make sure their clients are claiming all the tax benefits they are entitled to this tax season, no matter what the state of the IRS is.
“Because the Service is to a certain extent in disarray because of the convergence of all of these issues, it’s very important to make sure you have all of your ducks in a row and do everything correctly, just to give everything a very close look,” he said. “Make sure you’re working with a competent professional, that all of that individual’s questions and concerns have been answered and that you get it right.”
He points to the research and development tax credit as one area where tax professionals can help their clients. “We work a lot with R&D incentives, and we find that companies have oftentimes overlooked this very attractive incentive for which they may very well qualify,” said Everson. “You can actually go back now and amend returns to pick up that benefit from previous years, so you should be looking at things like that kind of provision and see if there is some benefit you qualify for, because what happens is the statute tolls at a certain point and it’s too late.”
As taxes have increased for many business owners in recent years, Everson believes it’s more important now to make sure those types of tax breaks are claimed by their tax practitioners. “For most people, their businesses are operating not as C corps but as partnerships and flow-throughs so the individual folks who own most businesses have seen their taxes go up because of the expiration of the Bush-era tax rates for higher-income folks,” he pointed out. “So they’re paying more than they were just a few years ago. Many businesses have returned to profitability, whereas they weren't profitable in the depths of the recession. It just makes sense to make sure that you're looking at everything and taking advantage of benefits to which you're entitled, not more than what you're entitled to, but what you're entitled to.”
Even though the R&D credit has only been extended temporarily like the other tax breaks, Everson believes it will survive the next time Congress considers the tax extenders. “I think that some things like R&D will most certainly continue because everybody on both sides of the aisle clearly understand that it's important to foster innovation, particularly to help small and midsize businesses,” he said. “That's where jobs are created. So I think the R&D will continue to be a feature of our tax code, but if we can make it permanent and get more stability and not go through this exercise of the extenders every year, that would be very helpful.”
Tax Reform Prospects
As for other tax reform measures, Everson isn’t so sure if Congress and the Obama administration will be able to reach agreement.
“I think that Paul Ryan [chairman of the House Ways and Means Committee] and Orrin Hatch [chairman of the Senate Finance Committee] will work very diligently with their committees and with each other to put together a good, solid, strong program,” said Everson. “The question is the President has been very bold in using his authorities and made it clear in that extenders debate that he wanted to make sure that anything that was done would also help the individual. Look at what he’s proposed in the State of the Union address. It didn’t play well with the Republicans at all, so there's an open question in my mind as to whether there will be a possibility for doing some sort of limited deal across party lines. That's going to be a tall order. Or will the Congress really develop the next iteration of tax reform and try to set it up so that it can be passed early in 2017 under the watch of a Republican President? That’s a fairly reasonably likely scenario given the President’s very clear position that he's not going to do things that benefit business owners alone.”
