IRS Audit Percentages Still Dropping

I have written before about the federal budget cuts and reduction of IRS personnel and what sorts of implications this has on the typical taxpayer.  One of the most noticeable consequences is that when you pick up the phone with a tax question or an inquiry into your tax account, you have about a 50/50 chance of getting through and speaking with someone.  Customer service is at an all-time low.

But something else has hit a record low, at least in the last ten years.  And that something is Audits.  Less than 1 percent of tax returns were selected for audit in 2014, and even fewer will be audited this year.

Obviously this is very good news for the taxpayer, but very frustrating for IRS executives, including Commissioner Koskinen, who stated that this trend “carries serious implications for our tax system and the nation.”  I can’t say for sure, but I’d assume that at least one implication is less revenue.  That’s my attempt at a joke.  Of course that’s one of the implications.  They are the Internal Revenue Service.  What’s the point if they’re not bringing in revenue?  Which leads me to an interesting question: Assuming it is true that your chances of being audited are the lowest they have been in 10 years because there are only about 11,600 revenue agents (and dropping) conducting audits, if you are selected, what are the chances of walking away unscathed?

The fact is some tax return audits result in zero liability.  But I could see that becoming a thing of the past.  First, I could see the IRS becoming more selective in the returns it picks for audit.  They will pick the returns with more obvious issues; ones that will more likely result in additional revenue for the government.  Second, I could see the IRS becoming more rigorous in their audit techniques.  If the overall number of audits is low, then the IRS has to be more “effective” in their audits to keep the revenue flowing.  I apologize in advance for this obnoxious analogy, but a boa constrictor often goes months in between meals, so when it does capture its prey, it is not going to let go before it squeezes the life out of them.  We’ll keep an eye on the IRS and see if these snaky predictions come true.

2015 Filing Season Won't be Pretty

Those who would know best are saying that we need to be prepared for one of the worst filing seasons on record during the first quarter of 2015. What makes one filing season worse than another?  It has to do with the level of service that the IRS can provide to taxpayers.  How fast can they answer the phone when taxpayers call?  How fast and accurately can the IRS respond to taxpayer correspondence?  How efficiently will the IRS be able to process tax returns and refunds?

The IRS had a goal of answering 80% of incoming calls last season, but only managed to answer 72%.  This filing season it is predicted that the IRS may only be able to pick up 53% of the time with a 34 minute average hold time.

The IRS Commissioner, John Koskinen has identified a few main reasons why things look so bleak:

  1. The IRS doesn’t have enough money to operate the way it should.  Funding levels are lower than they have been in years.
  2. The IRS has been tasked with administering new programs such as the Affordable Care Act and the Foreign Account Tax Compliance Act with no additional funding from Congress.
  3. Implementation of a new voluntary return preparer oversight program will also increase work load for IRS employees.
  4. There are 50 or so “tax extenders” — laws that Congress needs to vote on and determine if they will be extended or not.  The uncertainty could delay the start of the 2014 tax season.

National Taxpayer Advocate, Nina Olson, has a way of stating things in the plainest terms.  She has generated some great sound bites over the years.  Here’s her take on the upcoming tax season:

The filing season is going to be the worst filing season since I’ve been the National Taxpayer Advocate {in 2001}; I’d love to be proved wrong, but I think it will rival the 1985 filing season when returns disappeared.

I think these viewpoints have been colored by a recent TIGTA report that highlights “unfavorable trends” with the Automated Collection System (ACS).  Because the IRS does not have the resources to work cases properly, they have been “punting” many of them into Currently Not Collectible status or into the “queue” where cases can sit idle for months or years.  Consider yourself fortunate if you don’t have to interact with the IRS this tax season other than to file your return and wait for a refund check.

IRS Doctors & Nurses

Have you seen the comments from former IRS territory manager, Michael Gregory, in a recent “Ask Me Anything” session on Reddit?  Many readers have felt dissatisfied with his answers because he seemed to be overly concerned with defending the IRS, defending Lois Lerner, and griping about underfunding.  I talk with the IRS every day and I must say that this guy is definitely “one of them.”  As a 28-year veteran, admittedly it would be difficult to remove oneself from that role and the IRS lingo, even after retirement.  But this guy went a little too far.  As one Reddit user pointed out, he almost sounded like an IRS lobbyist.  I totally agree, but let’s move on to something more substantive in his comments.

At one point Gregory compared IRS specialists to medical specialists:

The IRS has 13,200 revenue agents and about 2,000 specialists. I managed 1/4 of the country’s specialists in engineering and valuation issues, with specialization comes an added degree of due diligence and accuracy. It’s like if you go to a doctor you get referred to a specialist – the same thing is true at the IRS.

I do not disagree with this comparison.  But the problem should be obvious: there aren’t near enough specialists to go around.  Think of the ratio of 2,000 specialists to how many million taxpayers?!  Same with revenue agents (the tax doctors); 13,200 isn’t nearly enough.  So what happens is a vast majority of taxpayer accounts are handled by (to complete the analogy) the nurses of the IRS — the customer service reps.  There are too many inexperienced, undertrained, underqualified employees.  It can be very frustrating for taxpayers who reach out for help, and they just want to be able to resolve their tax issues and move on.  In many cases, if they could just get in touch with a doctor, the issue could be resolved the same day.  But in reality they often get bounced around from nurse to nurse and nothing gets accomplished.

The IRS (IRS insiders) would have you believe that Congress can throw money at this problem and make it go away, but money alone will not change it if all they do is increase the number of nurses.

IRS Achieved Record Collections Despite Reduced Staff

Everybody thought that the IRS would be incapable of collecting as much tax revenue as years past with a reduced work force.  The loudest voices crying for a bigger tax collection budget came from within the IRS and from the Taxpayer Advocate.  The prevailing thought was that the IRS was just going to have to do more with less.  And apparently that’s just what they did.

According to a report released today by the Treasury Inspector General for Tax Administration (TIGTA), in 2013 the IRS increased total gross collections by 13 percent compared to 2012.  The IRS collected an unfathomable $2.9 trillion in fiscal year 2013, including $50.2 billion from enforced collections such as wage garnishments, bank levies, and seizures.  Interestingly these numbers were achieved with fewer examinations, fewer tax liens, and fewer levies & seizures.  It is difficult to tell what all this means.  Maybe the IRS is less likely to nail people for making mistakes on their taxes, filing late, and paying late.  But I think it is also safe to say that when they do catch you, they really sink their teeth in.  Maybe you think you’re safe because the IRS has bigger fish to fry, but if this report is any indication, I think the IRS is casting smaller nets and throwing fewer back.

IRS is Closed, but Still Accepting Your Payments

The IRS has provided a detailed explanation regarding what services are available during the lapse in appropriations — and it’s not much.

  • no live telephone assistance
  • no walk-in availability at local IRS offices
  • no refunds to be issued
  • no correspondence will be opened/reviewed
  • no tax return processing
  • no third party transcript requests
  • no installment agreement requests will be reviewed
  • no hardship status requests will be reviewed
  • no offers in compromise will be reviewed
  • no audit, exam, or appeal conferences
  • no levy releases (presumably)

The IRS clearly stated that they will not be issuing any new levies during the lapse in appropriations.  This applies to automated levies that are generated by ACS (Automated Collection System) as well as those issued by live field agents.  However, the caveat there is that some levy notices appear to have gone out after the government shutdown because they were post-dated.  If a particular levy notice was actually issued prior to the IRS closing its doors, then it will be impossible to get it released for the time being.  Also, “intent to levy” notices (those that warn taxpayers of future levy risks) will continue to be mailed out by the automated system.

But we know that at least some IRS personnel continue to work through the shutdown.  What are they doing?

  • cashing your checks
  • conducting criminal investigations
  • issuing emergency levies & seizures

Emergency collection actions usually involve situations where collection of the tax is in jeopardy: for instance, where the CSED (Collection Statute Expiration Date) is approaching and the IRS is on the verge of forever losing an opportunity to collect a substantial tax debt.  Even during normal operations, the IRS is quite selective in what it deems a “jeopardy” situation.  So during the IRS closure, this scenario would be “extremely limited” according to the IRS.

July 22nd: Optional Work Day for IRS Employees

Tax attorneys and other tax professionals plan their work days around their interactions with the IRS.  So, when the IRS is closed on a weekday, they take note.

Earlier this year the IRS had announced a series of planned nationwide furlough days to help with its “bottom line,” one of them to take place on Monday, July 22nd.  Then a couple days ago the acting IRS Commissioner, Daniel Werfel, announced by way of internal memorandum that the agency would no longer be forcing its employees to take that day off.  The furlough scheduled for July 22nd was lifted.  However, realizing that many IRS personnel have already made plans for a three-day weekend, Werfel is allowing anyone to still take the day off if they want.

So what does this mean for tax professionals who need to contact the IRS on July 22nd?  What can we expect?

In my years of working in the field of tax controversy, I have come to realize the impossibility of trying to predict too much when it comes to the IRS.  But my guess is that Monday is not going to be the best day to call them.  Given the opportunity to take a 3-day weekend with pay, what IRS employee would come in and work (besides may the overzealous brown noser or somebody too dim to realize he doesn’t have to be there)?!  I think the IRS is going to be severely understaffed, probably to the point that it would be no different than a furlough day from taxpayers’ point of view.  And those that do go in to work on the 22nd are going to be stressed and unhelpful.  It’s probably best to wait until Wednesday or Thursday if you need to call the IRS next week.

I have noticed that one of the consequences of the furlough days thus far has been a sharp increase in hold times when trying to call into the IRS.  People that don’t get through on a furlough Monday tend to call back on Tuesday, and then Wednesday, etc.  The calls pile up just like all their other work.  These days it is not unusual to wait 45-60 minutes before the IRS picks up you call.

Lawmakers Seek to Punish IRS and Reward TIGTA

A House subcommittee led by Rep. Ander Crenshaw (R-Fla.) agreed on a spending measure that would cut the IRS’ budget by 24 percent in 2014.  And on the other side of the coin, the bill would mean a $5.5 million budget increase for TIGTA (Treasury Inspector General for Tax Administration), the agency that has brought to light so many of the recent IRS missteps.

The bill is meant to “crack down,” “clean house,” and otherwise encourage the agency to be more careful and responsible in its administration of the tax laws.  It would also specifically address most of the problems we have read about in the news these last several months:

  • political targeting
  • training videos
  • lavish conferences
  • employee bonuses

Basically it would withhold funding until the IRS implements TIGTA recommendations.  TIGTA’s primary responsibility is to keep an eye on the activities and procedures at the Internal Revenue Service.  They are continually conducting audits, reporting on their results, and offering “recommendations” to the IRS when it is shown that they have fallen short.  Well, lawmakers are now hoping to make certain recommendations mandatory — mandatory in the sense that if they don’t make the changes then they won’t get full funding.

But the bill still has a long ways to go: first to the full Appropriations Committee, then to the House floor, then on to the Democrat-controlled Senate where it will face plenty of opposition.

Long Holiday Weekends for IRS This Year

Now that tax season is over for the on-time filers, many IRS employees can relax just a little.  And for at least 5 additional days this year they actually can relax at home . . . without pay.  Bloomberg apparently got its hands on an internal IRS memorandum informing IRS employees which days have been scheduled as furlough days this year.

The IRS furlough dates are:

  • May 24
  • June 14
  • July 5
  • July 22
  • August 30

These furlough dates were chosen to coincide with the federal holidays already on the calendar, so we will be looking at several four and five-day IRS closures throughout the rest of 2012.  I say five days because the IRS often shuts down early the day before a holiday, sometimes for computer maintenance, and sometimes so they aren’t disturbed during their potlucks.  I’ve always thought that “computer maintenance” was code for holiday party or potluck, but that’s just my slightly jaded opinion.

The IRS, as well as many other federal government agencies, is resorting to furloughs in reaction to budget reductions that took effect earlier this year.  Acting IRS Commissioner, Steven Miller, explained his reasoning for the agency-wide closures:

We came to a decision that balances our primary mission to serve the taxpayers and considers the effect on employees. We settled on having uniform furlough dates for everyone and closing down agency operations entirely. This way, the IRS can gain additional cost savings on utilities and other services in our work locations.

According to Miller, the closures will affect all local taxpayer assistance centers and call centers. should be up, but the availability of online services such as Transcript Delivery Service and other IRS practitioner tools is unknown.  And, if necessary, there may be an additional two furlough days coming in August and September.  Plan your vacations accordingly.

How Will the IRS Spend its $12.8 Billion Proposed Budget?

The IRS is asking for $12.8 billion for 2013 — that’s over $944 million more than their 2012 budget.  And $404 million of that will be spent on enforcement.  There will be more audits and more aggressive collection efforts in the near future.  Tax relief will be harder to come by and I don’t imagine that stacking tax debts will not be tolerated.

The only way the government can justify spending so much on the IRS is if they can expect a healthy return on the investment, and the IRS believes it can deliver.  In fact, the IRS’s crystal ball shows it will collect $1.48 billion with the increased funding.

How else will the money be spent?  Here are the IRS’ priorities:

  • increased scrutiny of offshore accounts and foreign financial transactions
  • crack down on fraudulent returns and identity theft
  • enhancing compliance and professionalism of return preparers
  • improvement of IT programs

Things are going to be very difficult for taxpayers who have fallen on hard times and can’t pay.  And to make matters worse, according to Fox Business writer Bonnie Lee, there’s no funding left over for improving customer service.

IRS Seeks to Cut Spending with Employee Buyouts

The National Taxpayer Advocate released its annual report to Congress earlier this week. Their top complaint is that the IRS is severely underfunded, which is causing a number of problems, including an erosion of customer service and a dwindling of taxpayer rights.

One way the IRS is dealing with a smaller budget is by offering early retirements and employee buyouts. This practice really illustrates the IRS’ dilemma. The more seasoned, higher-paid IRS employees are the only ones being offered buyouts because they are the only ones that qualify for early retirement, and the IRS can make a bigger dent in their payroll by shedding tenured employees. So the IRS will be losing some of their best people and filling empty spots with new employees. I know that the TAS is of the opinion that the problems at the IRS are primarily due to them being understaffed, but I have to believe that part of it is due to a large number of new employees who are still learning their job duties.

It seems like a lose-lose situation for the IRS. Under current budget constraints, if they keep their seasoned employees then they can’t afford to hire enough staff. But if they allow them to retire early then they would be, in effect, trading their MVPs for rookies.