The IRS is the government agency that everyone loves to hate. More than 30 years ago, I was one of more than 100,000 IRS employees. I left many good friends behind in 1982, but I sympathize with the …
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The IRS is the government agency that everyone loves to hate.
More than 30 years ago, I was one of more than 100,000 IRS employees. I left many good friends behind in 1982, but I sympathize with the taxpayers (many of whom are now clients) who characterize IRS workers as unresponsive and arrogant. The numbers support the impression: When I was there, we measured our response to taxpayer inquiries at 80 percent. Not great.
But it was twice as good as the current rate of 40 percent.
With recent dramatic changes to federal tax law (the Tax Cuts and Jobs Act, signed last December), the frustration levels have potential to skyrocket.
A recent visit to Lone Tree by Congressman Kevin Brady (R-Texas and Chairman of the House Ways and Means Committee) was timely. He and our own Congressman Ken Buck (R-Windsor) invited members of the CPA community to a roundtable to discuss the TCJA, which made sweeping changes to individual and corporate tax rates. It changed tax credits and deductions, it eliminated personal and dependent exemptions, and more.
It was a privilege to provide “grassroots” feedback to Brady, who helped create and support tax reform.
But most importantly, it was a relief to know that he anticipates the same bottleneck at the IRS that the rest of us foresee. Tax reform might also be tax simplification in the long run but right now too many questions remain unanswered, all of which were inspired by those big changes.
Two issues in particular threaten to affect millions of taxpayers.
First, a new deduction for business owners (Section 199A) complicates the way those owners pay taxes on the income derived from their businesses. While new deductions are always welcome, this code section resulted in confusing definitions and a labyrinth of limitations and computations.
For instance, let’s say Joe the Roofer operates as a sole proprietor, using crews of independent contractors, paying no wages to any employees — including himself.
One year he has profit and taxable income that equals $157,500, translating into a 199A deduction of $31,500 and saving him $7,560 in federal tax. But the next year his profit jumps by $100,000. He loses the entire $31,500 deduction simply because his business pays no wages. If he were to change his business structure and put himself on salary for $200,000, he would still be entitled to a 199A deduction of $20,000, saving him $7,400 in federal tax.
What part of this makes sense?
The second issue is the elimination of all meals and entertainment expenses as a deduction. But what about restaurants that provide reduced-cost meals to employees? Do owners of McDonald’s franchises really want their uniformed employees to go to the Taco Bells across the street for lunch? I doubt it.
We recently received proposed regulations on Section 199A from the IRS, but questions remain. And we have another looming bottleneck at the back-end of the tax return process: The IRS has lost 24 percent of its “enforcement” personnel since 2012. Who’s going to conduct all the necessary audits, and how fast?
Some taxpayers might have a knee-jerk celebration over this issue, thinking that IRS difficulties in collecting taxes might benefit everybody. Instead, it will harm everybody (as our system is structured today), because government services such as Medicare, Social Security and the Armed Forces depend upon those tax revenues.
The House recently passed an appropriations bill that would increase funding for the IRS. Taxpayers are trying to prepare NOW, so time is of the essence. Funding the IRS at appropriate staffing levels should be a priority, and I hope the Senate will support the appropriations bill passed by the House.
Fran Coet is founder and owner of Coet2 CPAs in Westminster.
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