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The Probability Of Lower IRS Budgets Is That A Good Thing?

Added by Richard G. Smith, John McGown, Jr. in Articles & Blogs, Tax Law on March 9, 2016

By Richard G. Smith and John McGown, Jr.

Less than 1% if the individual returns will be audited in 2016. Business tax returns and high-income taxpayers obviously have a higher audit rate, but the fact is the chances of federal income tax audits for most taxpayers are small and are diminishing. Recently, the House and Senate Appropriations Committees recommended a decrease in funding for the IRS. This is on top of 17% in decreases the IRS has already experienced since 2010. On November 9, 2015, seven former Commissioners of the IRS wrote to the chairpersons of these Committees to express their concerns about these prospective budget cuts.

For most of us, the first reaction to this news is positive — why would any us object to a lower risk of audit, or to a handicapped IRS? Well, there are some reasons to pause before celebrating this news.

First, for those of us who deal with the IRS on behalf of our clients, it could mean that it will be even more difficult to contact the IRS to resolve problems. Already, the waiting time for calls is extraordinarily long, and it is not uncommon to be on hold and then to be cut off because of the volume of calls.

Second, a similar concern is that IRS auditors and agents may be less experienced, with a greater risk they will take unreasonable positions in audits. To meet the lower appropriations of the last five years, the IRS has allowed attrition in employment, and according to the Commissioners’ letter, another 38% of IRS personnel will be eligible to retire in the next three years. This problem will not necessarily be solved by throwing more money at the IRS, but reduced appropriations will certainly not help the IRS replace this knowledge and experience. This problem is exacerbated, according to the former Commissioners, by the fact that the volume of new tax laws and initiatives continues to increase. Consider the new taxes under the Affordable Care Act, the foreign account disclosure requirements, and growing issues of identity theft – how to prevent it and how to address it when it occurs.

Third, we need to be concerned about whether the burden of compliance might be shifted to taxpayers themselves and their advisors. Recent examples of this trend include the enhancements in tax return preparer liability (are CPAs now audit screeners for the IRS?) and the requirement of reporting uncertain tax positions (where taxpayers must self-report their aggressive positions and virtually guarantee they will be audited). Will this trend increase with either legislation or administrative action?

Fourth, from a “microeconomic” perspective, is it better for your company if you believe your competitor may be more likely to lower costs by taking overly aggressive tax positions, with little risk of audit? Will your company feel the need to take similar positions simply to stay competitive? There is that risk, and a risk of a “race to the bottom” of the tax compliance ladder.

Finally, from a “macroeconomic” standpoint, is it best for our country to allow and even make easier the evasion of tax, by providing inadequate funding for audits? In an era of constantly expanding budget deficits, it seems odd that we as a nation would avoid and even block steps that might gain more revenue from sources that don’t require tax increases but simply better compliance and collection.

It seems counterintuitive for a tax professional to support the IRS or any taxing agency, where so often oppose them. But at some point, an inefficient tax collector is problematic for all of us, and we have to ask ourselves whether it is in our interests for the tax collector to become more inefficient?

The November 9 Commissioners’ Letter struck a chord with John McGown. He wrote his three Congressmen on November 17 and traveled from Idaho to Washington, DC and met with a representative from Senator Mike Crapo’s office on November 24. Senator Crapo Chairs the Subcommittee on Taxation and IRS Oversight. McGown made his case for increased IRS funding for reasons described above. While small, the IRS budget for the current fiscal year increased by 2.6% (i.e., $290 million). With those funds, the IRS plans on hiring 1,000 additional customer representatives and to decrease the hold time to under 20 minutes. McGown sees this increase in service by the IRS as a win for all involved.

If you would like more information about this topic, or other legal issues, please contact a member of our Tax, Estate Planning and Employee Benefits Group 208.344.6000.