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The Impact of IRS Budget Cuts

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In the wake of continuing IRS budget cuts is the agency turning into a paper tiger?  IRS’ funding level has sharply declined since 2010.  Its employee head count has decreased significantly.  At the same time its workload has been expanding, partly due to new programs such as health care reform and the complicated foreign account reporting rules, as well as its efforts to prevent fraudulent refunds from going to scammers who commit tax identity theft.  Many are feeling the impact of the cuts… as both enforcement and service have waned.

IRS is struggling on the enforcement front.  Examinations are plummeting.  Last year’s audit rate of 0.96% for individuals was the lowest since 2005.  Stated another way, the Service examined just one out of every 104 filed returns.  And the individual audit rate for 2014 is expected to drop to 0.80%.  Exam rates for partnerships, S firms and regular corporations are steadily falling, too.  A lot of filers are being let off the hook because of scarcer audit resources.  For example, IRS recently admitted to Treasury inspectors that it is able to audit a mere 4% of ex-spouses who failed to report alimony that the payer deducted.  Also, the agency is balking at going after overstatements of the retirement savings credit.

Two enforcement initiatives have been put on hold because of budget cuts:  A planned project to match sales income reported on 1099-K forms with sums listed on business returns.  Also, an electronic review program to sniff out fraudulent returns.  And the agency is suffering brain drain as experienced examiners retire and rookies replace them.  With training budgets cut, it’s harder to get them up to speed on complex tax issues… foreign business activities, multiple pass-through entities, etc.

It’s also pared back on important services relied upon by filers and preparers.  Long wait times when calling the IRS are now the norm, not the exception.  The agency isn’t answering any tax law questions from taxpayers.  Instead, the Service is directing callers to find the answers themselves in IRS publications or on its Web site.  In addition, tax professionals who call the practitioner priority line can get assistance only on account issues for their clients and not with legal inquiries.

IRS is way behind on answering correspondence from taxpayers.  Last year, it responded timely to fewer than half of taxpayers who protested adjustments.  Also, because of the agency’s significant delays in processing incoming mail from taxpayers, many filers who sent in documentation that a tax bill was erroneous keep getting billed.

The Service will issue fewer rulings to taxpayers this year… down by 10%.  It no longer offers free walk-in tax preparation assistance at its offices.  And it has shuttered two electronic services used by tax professionals:  The Disclosure Authorization and the Electronic Account Resolution applications.

Don’t expect IRS to come roaring back anytime soon.  Fiscal austerity will be the norm for the near term as Congress keeps a tight grip on the purse strings.

 Source: Kiplinger Tax Letter 7/3/14


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