National Taxpayer Advocate's June 30, 2015 Report To Congress

Twice a year the National Taxpayer Advocate submits a report to Congress. The Advocate is required to submit these without prior review by the Commissioner of the Internal Revenue Service, the Secretary of the Treasury or the Office of Management and Budget. A report was issued June 30, and it identified the objectives of the Advocate’s office for the upcoming fiscal year.

The National Taxpayer Advocate is Nina E. Olson. We have spoken of her before, and I am a fan.  

The following caught my eye:

The most serious problem facing U.S. taxpayers is the declining quality of service provided to them by the IRS when they seek to comply with their tax filing and payment obligations."

Given that this is a co-equal reason for the IRS to exist (the other being to collect revenue), this is a rather serious charge.

Consider the following:

·         The IRS hung up on approximately 8.8 million taxpayers during this year’s filing season. The IRS dryly refers to these as “courtesy disconnects,” ostensibly as proof that they too have read Orwell’s 1984.

o   This number was up from 544,000 hang-ups during the 2014 filing season.

·         Only 37% of people using toll-free lines were able to speak with a human being.

o   Down from 71% last year.

·          The IRS has announced that it will no longer answer any tax law questions at all.

·         The IRS will eliminate tax preparation altogether.

o   It used to maintain approximately 400 walk-in sites and helped taxpayers prepare around 500,000 tax returns annually.

·         The IRS answered only 17% of the calls from people whose account was blocked on suspicion of identity theft.

·         Don’t expect that hiring a tax professional will resolve the logjam. Professionals were able get through less than 50% of the time.

From the perspective of a practicing tax CPA, I found interacting with the IRS this filing season to be unpleasant, if not futile. I find myself with divided opinions: many of the examiners and officers I have met and worked with over the years are responsible and likeable enough. Gather them together however and you have an organization that has lost the trust and confidence of a sizeable number of taxpaying citizens.

Ms. Olson does point out that the IRS has been charged with additional tasks in recent years, such as pursuing foreign assets (FATCA) and "assisting" the American public with their health insurance (ObamaCare). There has simultaneously been a reduction in agency funding.The GAO has reported that IRS funding declined approximately $900 million since fiscal year 2010, for example, resulting in the elimination of approximately 10,000 full-time equivalent positions.

Let’s be frank: under this Congress there will not be – nor should there be – additional funding for an agency that has been weaponized for political purposes. Paul Caron, a Pepperdine tax law professor, maintains a count and compendium of IRS misbehavior at TaxProfBlog  (http://taxprof.typepad.com/taxprof_blog/irs-scandal). He is perilously close to 800 days and will likely exceed that count by the time you read this. If smoke indicates fire, then someone must have burned down the warehouse district to generate that much smoke.

Is there a solution? Yes, but it will probably have to wait until November, 2016. But you already knew that.

Obama’s $3 Million IRA Cap

We have received several calls on the proposed $3 million cap on 401(k)s and IRAs. Some of those discussions have been spirited.

What is it? Equally important, what is it not?

The proposal comes from the White House budget. Here is some text:

The budget will also show how we can provide targeted tax relief to strengthen the economy, help middle class families and small business and pay for it by eliminating tax loopholes and make the tax system more fair. The budget will include a new proposal that prohibits individuals from accumulating over $3 million in IRAs and other tax-preferred retirement accounts. Under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving. The budget would limit an individual’s total balance across tax-preferred accounts to an amount sufficient to finance an annuity of not more than $205,000 per person per year in retirement, or about $3 million in 2013."

Let us point out several things:

(1)    The proposal would not force monies out of an existing retirement plan. It would instead prevent new monies going into a plan.

This raises a question: should one draw enough to reduce the balance below $3 million, would one be able to again contribute to the plan?

(2)    The proposal uses the term tax “preferred” rather than tax “deferred.”  This indicates that the proposal would reach Roth IRAs. Roth IRAs are not tax deferred, as there is no tax when the funds come out. They instead are tax “preferred.”

There is some rhyme or reason to this proposal. $205,000 is the current IRC Section 415 limit on funding defined benefit (think pension) plans. The idea here is that the maximum tax deduction the IRS will allow is an amount actuarially necessary to fund today a pension of $205,000 sometime down the road. The closer one is to retirement, the higher the Section 415 amount. The farther one is, the lower the Section 415 amount. This proposal is somewhat aligning limits on contribution plans with existing limits on benefit plans.

(3)    The $3 million is an arbitrary number, and presumably it would change as interest rates and actuarial life expectancies change over time. If longevity continues to increase, for example, the $3 million may be woefully inadequate. Some planners consider it inadequate right now, at least if one is trying to secure that $205,000 annual annuity.

(4)    Would the annuity amount increase with inflation? Assuming an average inflation rate of 4.5 percent, one would lose almost three-quarters of a fixed annuity’s purchasing power over 30 years.

The frustrating thing about the proposal is that it affects very few people. The Employee Benefit Research Institute estimates that only 1% of investors have enough to be subject to this rule. This of course feeds into the perceived anti-success, anti-wealth meme of this White House.

(5)    The amount of money to be raised over a decade is also chump change for  the federal government: less than $10 billion.

Something to remember is that account balances in 401(k), SEP, SIMPLE and regular IRA accounts will be taxable eventually. IRAs are subject to minimum distribution rules, for example. The larger the balances, the more the government will take in taxes. Dying will not make the tax go away. In fact, it may serve to accelerate required distributions to a beneficiary and taxes to the government.

The budget was dead on arrival at Capitol Hill. Let us hope that less ideologically rigid minds on the Hill keep it so.

The President’s Budget Tax Proposals

The President delivered his proposed budget for fiscal 2013 this Monday. The budget included as one of its five tax “reform” principles the following:

• Simplify the Internal Revenue Code

Sounds good. Here are some proposed tax “simplifications”:

• Provide a temporary 10% tax credit for new jobs and wage increases
• Provide additional tax credits for investment in advanced energy manufacturing
• Provide tax credit for energy-efficient commercial building property expenditures
• Reform and extend Build America Bonds
• Provide for automatic enrollment in IRAs, including a small-employer tax credit
• Expand the earned income tax credit for larger families
• Expand the child and dependent care tax credit
• Provide tax incentives for locating jobs and business activity in the United States
• Provide new manufacturing communities tax credit
• Target the domestic production deduction to domestic manufacturing activities
• Provide a tax credit for the production of advanced technology vehicles
• Provide a tax credit for medium- and heavy-duty alternative-fuel commercial vehicles
• Modify certain energy incentives
• Eliminate capital gains taxation on investments in small business stock
• Expand the tax credit provided to qualified small employers for nonelective contributions to employee health insurance
• Extend and modify the new markets tax credit
• Designate growth zones
• Provide tax incentives for transportation infrastructure
• Modify tax-exempt bonds for Indian tribal governments
• Allow current refundings of state and local governmental bonds
• Reform and expand the low-income housing tax credit
• Defer deduction of interest expense related to deferred income of foreign subsidiaries
• Determine the foreign tax credit on a pooling basis
• Tax currently excess returns associated with transfers of intangibles offshore
• Limit shifting of income through intangible property transfers
• Disallow the deduction for nontaxed reinsurance premiums paid to affiliates
• Limit earnings stripping by expatriated entities
• Modify tax rules for dual capacity taxpayers
• Tax gain from the sale of a partnership interest on a lookthrough basis
• Prevent use of leveraged distributions from related foreign corporations to avoid dividend treatment
• Extend Sec. 338(h)(16) to certain asset acquisitions
• Remove foreign taxes from a Sec. 902 corporation’s foreign tax pool when earnings are eliminated
• Require a certified taxpayer identification number (TIN) from contractors and allow withholding if the contractor does not provide a TIN
• Require e-filing by any entity that must file Schedule M-3
• Authorize Treasury to require additional information to be included in Form 5500, Annual Return/Report of Employee Benefit Plan
• Allow the IRS to require prospective reclassification of misclassified workers
• Extend the statute of limitation where a state adjustment affects federal tax liability
• Require taxpayers who prepare their returns electronically but file their returns on paper to print a 2D bar code
• Impose a penalty on failure to comply with electronic filing requirements

Don’t worry too much about this. The Senate hasn’t passed a budget in years.

Paying a Fair Share Act

U.S. Senator Whitehouse (D-R.I.) has introduced a tax bill named the Paying a Fair Share Act.

This is the Buffett Rule. It would apply only to taxpayers with income over $1 million. At income levels over $2 million, there would be a flat 30% tax. At income between $1 million and $2 million there would be a phase-in to get the effective tax rate to 30%.

The bill is co-sponsored by the following:

·         Sen Daniel Akaka, D-Hawaii

·         Sen Mark Begich, D-Alaska

·         Sen Richard Blumenthal, D-Conn.

·         Sen Tom Harkin, D-Iowa

·         Sen Patrick Leahy, D-Vt.

·         Sen Bernie Sanders, I-Vt.

·         Sen Chuck Schumer, D-N.Y.

It is very doubtful that this bill is going anywhere.

Here is another proposal. We can call it the Biden Rule:

         Politicians who stay in Washington more than 10 years pay a 100% tax rate.

IRS Buyout Packages

I saw today in Government Executive that the IRS is extending buyout packages to as many as 5,400 IRS employees. The buyouts are capped at $25,000 per person, and eligible employees have until November 22 to decide.

Why are they doing this?

Both the House and Senate have proposed cutting the IRS fiscal 2012 budget by up to $500 million.