Filing season begins with a number of pluses and minuses on the horizon, but overall should be smoother than last year.
“It’s good that the extenders legislation got passed two weeks before the end of the year,” said Steve Henley, a managing director at Top 100 Firm CBIZ. “That’s better than the last time around, when the bill didn’t get passed until January 2. They’re still late, but that will probably not add a tremendous burden to busy season. I’m sure that many accountants have anticipated the changes they made, so the extenders shouldn’t make a huge impact this season, especially given the fact that they were enacted two weeks prior to the end of the year.”
Roger Harris, president of Padgett Business services, agreed. “Preparers are getting accustomed to dealing with [Affordable Care Act] issues,” he said. “And there are some minor changes in the tangible property regulations, but not the confusion we had last year regarding Form 3115. Everything is set for it to be a relatively smooth filing season, but that doesn’t mean we can’t be surprised. I’m an optimist, but I also thought I was going to win Powerball.”
The biggest issue that practitioners are concerned with is the reduction in taxpayer service, according to Cathy Mueller, director of operations for Peoples Income Tax. “Here in Richmond, [the IRS] tells you in a recording that they just don’t answer the phone anymore,” she said.
Of course, that may change with the injection of $290 million of increased funding. Internal Revenue Service Commissioner John Koskinen said in mid-January that the extra funding would help address three areas of high priority: taxpayer service, identity theft and cyber-security.
“We will be able to hire up to 1,000 additional customer service representatives to answer our toll-free help lines this filing season,” he said. “With this and other resources we are applying in this area, we expect to improve on our phone service levels from last year. But I do want to caution that, even with these additional resources, we do expect our toll-free taxpayer help lines to be extremely busy again this filing season. There will be wait times before people can get through, since the additional funding is still less than needed.”
The commissioner’s statement followed on the heels of the National Taxpayer Advocate’s 2015 annual report to Congress, which criticized the lack of service, and Ways and Means Committee Chairman Tom Brady’s call on the IRS to immediately improve customer service. “Reaching an IRS employee often seems as unlikely as winning Powerball,” said Brady, referring to statistics in a just-released Government Accountability Office report. “The GAO has confirmed once again that few Americans are able to actually reach an employee and get the help they need. It is clear that the IRS needs to reexamine its priorities.”
In her report, National Taxpayer Advocate Nina Olson voiced her concern that the combination of reductions in personal service and the IRS’s long-term plans to direct taxpayers with questions to preparers and other third parties, along with the expansion of IRS user fees, would create a “pay-to-play” tax system, where only taxpayers who can afford to pay for tax advice would receive personal service, while others will be left struggling for themselves. (See page 10 for more details.)
The No. 1 problem that Olson named in the report is the “Future State” plan, which aims to transform the way the IRS interacts with taxpayers. Olson’s concern is that the plan, if implemented, would institutionalize the lack of service currently received by taxpayers and pass it off to tax pros to provide.
Beanna Whitlock, former IRS director of National Public Liaison, agreed with Olson. “I don’t mind giving the IRS more money, but it has to be better managed,” she said. “Where did the money come from that they’re using to hire these outside consultants? The IRS has taken money that would have gone for service and hired an outside management firm to come up with a plan. The IRS needs to be fully funded, but Congress needs to be able to say what they do with their money.”
CRIMINAL CONCERNS
A major concern for the IRS this season is ID theft and preventing fraudulent refunds, observed Mueller. “Some taxpayers who were never concerned with that may now be reluctant to e-file. We have to explain to them that it’s safer to e-file than to mail in a return.”
“Some states have announced they won’t issue refunds until March in an effort to prevent ID theft,” she said. “California and North Carolina did it for budget reasons a couple of years ago. It’s always possible that with the new program to prevent ID theft that refunds in general might be a little slow this year. We won’t know until they start coming out.”
“ID theft is really not a hard problem to solve,” observed Harris. “Keep April 15 as the due date for returns, but don’t issue refunds until August 15. That would give the IRS time to accept the data from all the W-2s and 1099s, and make sure that the returns are matching. That would eliminate almost all ID theft, but the IRS is under pressure to have almost immediate refunds. Politically, they would get killed if they held up refunds.”
SHORT OF FUNDS
A lot of challenges that the IRS faces are due to budgetary constraints, noted Deborah Gregory of Gregory Law Group PLLC, who was formerly a senior attorney in the IRS Office of Chief Counsel.
“We’re seeing a new trend in the IRS trying to push more things to automated service,” she said. “For example, we’re seeing more correspondence audits with complicated tax issues.”
Normally a correspondence audit involves simple issues such as the disallowance of a claimed deduction, or a mathematical error, she explained. “But now a lot more complicated tax issues that require the expertise of a field auditor are being handled by correspondence audits. The reason is budgetary constraints. They still have not backfilled my position at the office here in Dallas.”
The push to do more online case resolution will be a disaster for the IRS and for the American taxpayer, Gregory believes. “Taxpayers and their representatives have to talk to someone to adequately understand what is going on,” she said. “And many taxpayers will not be able to afford to hire a tax professional to help them with an issue.”
A provision in the Fixing America’s Surface Transportation Act gives the IRS a huge new collection tool, according to Gregory. “It allows the IRS to revoke the passport of anyone who owes the government at least $50,000. It’s an enormous tool, especially against ex-pats. The IRS can only collect against assets held domestically, but if you live and have your assets overseas, it may put a crimp in your desire to see your dentist or your grandchildren graduate.” Those outside the U.S. when their passport is revoked will be allowed to return home.
ACA ISSUES
The implementation of ACA penalties will impede taxpayers in current resolution programs, according to Gregory. “When you have taxpayers in a payment plan program, and they get hit with a penalty for failure to have health care, they will default the payment plan and have to start the process all over,” she said. “Taxpayers need to understand that they should do everything they can to avoid defaulting under the plan.”
The $100-a-day penalty for employers that aid their employees in purchasing health insurance is something that needs to be fixed, both Whitlock and Harris noted.
“If a small employer doesn’t want to deal with the hassle of a group plan but wants to help the employees, and one of them goes out and buys their own health insurance and the employer gives them $200 a month to help pay for it, it is considered in violation of the market reforms of the ACA and subjects the employer to a $100-per-day-per-employee penalty as long as the reimbursement is in place. In theory if they do it for an entire year, you’re talking about a $36,500 penalty per employee,” Harris said. “The provision needs to be repealed. All the congressmen I’ve talked to agree that it’s bad, but they can’t get it fixed. They get caught up in Washington gobbledegook — what does it cost, has it been scored, what does the other side think.”
To get it changed, Harris said, there might have to be a sacrificial lamb that goes on a TV show and says they just got put out of business. “The next day, every politician will be on TV promising to fix it.”
