President Donald Trump just cut funding for the Internal Revenue Service (IRS), but these recent changes are part of a long-term trend at the agency. While some might rejoice to see an IRS with a smaller footprint, the cuts will affect a wide range of Americans, and cause plenty of confusion. For tax pros, the time is ripe to upgrade your client services.
Tax attorney Robert McKenzie examines the connection between the IRS’s new enforcement priorities and how you’ll need to serve your clients going forward in his live webinar for Eli Financial, “2018 IRS Representation Update.” McKenzie covers the agency’s updated examination and collection procedures and criminal investigation initiatives—and delivers important counsel for practitioners.
Tax Day Computer Meltdown Illustrates Agency Funding Woes
As millions of Americans rushed to file their taxes on April 17, many were greeted with an error message rendering filing impossible. The message was the result of hardware master file malfunction, National Public Radio reported, which in turn was blamed on budget cuts and staffing cutbacks.
“The budget has been continually under pressure for the last eight years,” former IRS Commissioner John Koskinen said. “We have almost 20,000 fewer employees and 10 million more taxpayers, so sooner or later something’s gotta give.”
The failure, or one like it, was widely predicted in the months and even years before the glitch occurred. As Nextgov reported in March, the IRS’ Individual Master File, which is a decades-long list totaling about one billion taxpayer accounts, dates to the 1960s. That file has been deemed the government’s oldest operating computer.
Plans are afoot to modernize the system, the IRS told Nextgov, though those plans are now years behind schedule.
Audits: Unreported Income & Nonsensical Biz Deductions Still Raise Red Flags
As the budget has been drained, IRS’ enforcement priorities have shifted. Taxpayers now have a .44 percent chance of being audited, down from about 1 percent in 2010, Fortune reported. IRS has lost about one-third of its enforcement employees since the 2010 peak, the Wall Street Journal found.
IRS priorities for 2018 now center around implementation of the Tax Cuts and Jobs Act, identifying regulatory burdens, executive compensation, and regulation of financial institutions and products, according to a recent update. Red flags that could trigger a tax audit this year remain relatively unchanged from years past, the Motley Fool reported: high earners get more scrutiny, as do those earning nothing, and the IRS also hunts down unreported income and business deductions that don’t make sense.
Those thankful for the falling chances of an audit will likely stay happy in the coming years: IRS enforcement funding has fallen by 23 percent since 2010.
“The situation is unlikely to change soon,” reported Aaron Elstein for Crain’s. “That’s because Congress’ big spending bill recently signed by President Donald Trump cut IRS funding by $124 million for everything except guidance and new tax forms pertaining to the new tax law, for which the IRS got $320 million. House Republicans have been squeezing the IRS enforcement budget for years, notably after passing Obamacare and previously upon holding hearings at which businesses complained about raids and other aggressive enforcement tactics by the agency in its efforts to collect unpaid taxes.”
While enforcement may be down and computer failures up, tax pros need to stay abreast of how federal mandates and shrinking budgets are affecting the agency and how clients interact with it. As McKenzie notes, despite budget woes affecting your clients, IRS collection procedures continue to change and examinations go on.
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