Stanford University Tax Communications Between the Client & IRS TAX Reform Proposals Discussion

For this week’s discussion, choose 1 of the following topics and post your initial response in the Discussion Board.

  1. Discuss how some of the deficiencies identified in Chapter 18 were partially resolved with the passing of the Tax Cuts and Jobs Act of 2017.
  2. Locate the most recent Annual Report to Congress by the National Taxpayer Advocate. Discuss the 10 most serious problems encountered by taxpayers, as identified in the report.

Please do the discussion and do response each posted below # 1 -3

Posted 1

There are 3 out of 6 perceived deficiencies in chapter 18 that were partially resolved with the passing of the Tax Cuts and Jobs Act of 2017 discussed below.

Significant Compliance Costs: The growing complexity of the U.S. tax code had led to significant compliance costs for households and businesses. Businesses bear majority of the costs, which are estimated to be nearly $140 billion in 2015; whereas individual compliance costs estimated to be $94 billion (Everett et al., 2016). Tax Cuts and Jobs Act of 2017 (TJCA) increased standard deduction, eliminated many deductions which decreased the number of taxpayers who itemize deductions results in compliance saving. This aided in reducing the time spent filing times. (Be Tax Ready, 2019).

Disproportionate Benefits to the Wealthy: A well-known saying is that the tax system favors the wealthy because the wealthy are not paying their fair share of taxes (Everett et al., 2016). The alternative minimum tax (AMT) plays a huge major role redistributing the tax burden. With the passing of TCJA, the individual AMT remained the same; however, the exemption levels and income threshold increased resulting in a decrease of taxpayers subject to the AMT (Be Tax Ready, 2019).

Underground Economy is Untaxed: The government’s side of compliance costs are the taxes that are owed yet not collected (Everett et al., 2016). “The system fails to collect all taxes that are owed” (Everett et al., 2016). Tax gap is the difference between taxes owed and taxes paid on a timely basis (Everett et al., 2016). The tax gap represents the amount of noncompliance with the tax laws. Under the TCJA Large Business and International initiated the TCJA Campaign that closely monitor issues on returns (LB&I Active Campaigns, n.d.).

Be Tax Ready – understanding tax reform changes affecting individuals and families | Internal Revenue Service. (2019, February). IRS. https://www.irs.gov/newsroom/be-tax-ready-understanding-tax-reform-changes-affecting-individuals-and-families

Everett, J. O., Hennig, C., & Nichols, N. (2016). Contemporary Tax Practice: Research, Planning and Strategies (4th ed.). CCH Inc.

Posted 2

The Taxpayer Advocate Service is an independent organization within the Internal Revenue Service (IRS), created to help taxpayers to resolve common tax problems within the IRS when these problems are not being resolved as they normally should be (Everett, Hennig, & Nichols, 2016, p. 9-4). As part of its report to Congress each year, the Taxpayer Advocate Service is tasked with identifying at least the 20 most serious problems which taxpayers have encountered when attempting to work with the IRS (Everett, Hennig, & Nichols, 2016, p. 9-4). For 2020, the 10 most serious problems included:

* IRS Recruitment, Hiring and Retention

Due to budget cuts, this has been an ongoing issue for the IRS. This should be less of an issue as the funding for the IRS improves, as explained in articles by Dore and Rosenberg (Dore, 2021) and (Rosenberg, 2021).

* Telephone and In-Person Service Issues

These issues are quite similar– the problems seem to stem from outdated technology, and limited staffing, both of which would be addressed by additional funding.

* Online Records Access Difficulties

Online records access is certainly a challenge, but resolving these concerns could be a two-edged sword, so to speak. While many taxpayers would want to be able to access their records online, migrating these to online access would come at an additional cost to the government. Another downside are the data risks. Any time records are moved online, there is a chance that users could either have their information accessed by unauthorized parties, or that the information could become a target for cyber criminals, such as the potential for ransomware attacks. These potential risks would have to be handled carefully by the government, to maintain taxpayer confidence in our tax system.

* Digital Communications Problems

Problem resolution takes longer if digital communications are not up-to-date. Still, the same challenges can potentially arise when dealing with sensitive taxpayer information. Additional security measures may need to be put in place, both to prevent potential fraud (or impersonation) of the IRS by bad actors, as well as to limit the potential for fraud or abuse by less-than-honest taxpayers (or those who are not who they claim to be).

* Limited E-Filing and Digitalization Technology

E-filing has worked extremely well for the IRS, and there is no reason it should not be expanded, as long as the appropriate data security measures are still in place. The IRS would do well to include public key cryptography, or some other method of securing taxpayer data, so that in the event of a data breach by hackers or other unauthorized access, highly precious taxpayer data is not released in an unencrypted format.

* Information Technology Modernization

This is another problem which will likely benefit from the additional funding promised for the IRS, so is less of a concern.

* Correspondence Exam Challenges

Accountable and knowledgeable contacts for correspondence audits will be greatly enhanced as the IRS hires more auditors, particularly if it also updates its training and pay structures to be more competitive with the private sector.

* International Taxation Concerns

IRC Codes §6038 and §6038A are assessed immediately, and have to be appealed by the taxpayer. Excessive delays for these costly penalties are a challenge, and may ultimately need to be adjusted by Congress to minimize the impact on taxpayers who shouldn’t be liable for these penalties in the first place.

* Amended Returns Delays

Amended returns are not processed as quickly as they should be, and the additional staffing and budget may address these delays. However, this problem could also be the result of internal inefficiencies within the IRS, which would need to be handled within the organization itself.

* Refund Processing Delays

Similar to the issues with amended returns, these delays might be due to limited staffing or budgets, or could be internal inefficiencies which need to be addressed by IRS management.

The good news is that most of the issues identified by the Taxpayer Advocate Service would be resolved with more budgeting and staffing, as well as Information Technology modernization. With an additional $80 billion budget request, this supplemental funding should go a long way towards fixing the problems which the IRS currently faces.

References:

Dore, K. (May 5th, 2021). Biden’s $80 billion plan to boost IRS audits may target

small businesses. CNBC. https://www.cnbc.com/2021/05/05/bidens-80-

billion-plan-to-beef-up-irs-audits-may-target-wealthy-small-business-

owners.html

Posted 3

According to IRC §7803(c)(2)(B)(ii)(III) the National Taxpayer Advocate is required to prepare an annual report to Congress that includes the ten most serious problems taxpayers encounter each year. The most recent report was produced for tax year 2020 and the ten most serious problems are listed and discussed below.

  1. IRS RECRUITMENT, HIRING, AND EMPLOYEE RETENTION: Quality Taxpayer Service and Protection of Taxpayer Rights Are Directly Linked to the IRS’s Need to Improve Its Recruitment, Hiring, and Retention Strategies (Taxpayer Advocate Service, n.d.)

The IRS workforce and budget has shrunk close to 20% since FY2010. Also, the workforce is aging at the IRS with 26% of the workforce eligible to retire in FY2021. The IRS needs to increase hiring and recruitment of new employees externally as soon as possible. The Taxpayer Advocate Service (TAS) recommends the IRS hire “additional human resource specialist”, improve the internal hiring process to speed up the process, and “renegotiate the hiring process with the National Treasury Employees Union to allow for up to 50 percent of all hiring announcements to be filled externally” (Taxpayer Advocate Service, n.d.).

2.TELEPHONE AND IN-PERSON SERVICE: Taxpayers Face Significant Difficulty Reaching IRS Representatives Due to Outdated Information Technology and Insufficient Staffing (Taxpayer Advocate Service, n.d.)

The IRS received more than 100 million calls during FY2020 and only answered about 24 million of them. The average hold time for the taxpayers that talked to a representative was 18 minutes. There also has been a trend of the TAC centers serving less people each year and in 2020 that trend was exacerbated by COVID-19. “The number of taxpayers the IRS has served face-to-face has declined from 4.4 million five years ago in FY 2016, to 2.3 million in FY 2019, to 1.0 million in FY 2020” (Taxpayer Advocate Service, n.d.). The TAC recommends the improve the telephone and TAC services by the expansion of customer callback technology and also adding the option of videoconferencing (Taxpayer Advocate Service, n.d.).

3. ONLINE RECORDS ACCESS: Limited Electronic Access to Taxpayer Records Through an Online Account Makes Problem Resolution Difficult for Taxpayers and Results in Inefficient Tax Administration (Taxpayer Advocate Service, n.d.).

The TAS is recommending that the IRS do an overhaul of the online access to taxpayer accounts similar to a banking institution. The TAS feels that the inability to do simple task like update address, view prior year returns and notices, submit documents, and many other items increases the number of phone calls and paper correspondence (Taxpayer Advocate Service, n.d.). Advancing this area will also help with number 2 above and possibly reduce the number of phone calls.

4. DIGITAL COMMUNICATIONS: Limited Digital Communications With the IRS Make Problem Resolution Unnecessarily Difficult for Taxpayers (Taxpayer Advocate Service, n.d.).

During 2020, the IRS allowed temporary workarounds to transmit documents electronically, and expanded the list of forms that an electronic signature would be accepted due to the COVID-19 pandemic. The TAC recommends that the IRS should make these permanent improvements to the IRS’s digital service offerings (Taxpayer Advocate Service, n.d.). “Taxpayers need the option to correspond with the IRS digitally, including attaching and transmitting documents in a secure manner” (Taxpayer Advocate Service, n.d.).

5.E-FILING AND DIGITALIZATION TECHNOLOGY: Failure to Expand Digitalization Technology Leaves Millions of Taxpayers Without Access to Electronic Filing and Wastes IRS Resources (Taxpayer Advocate Service, n.d.)

The TAC recommends that the IRS expand it “antiquated information technology systems” in order to improve and expand electronic filing and to digitize paper returns (Taxpayer Advocate Service, n.d.). By improving the processing of the paper returns to a digitized format, the IRS will be able to improve service to tax payers and also reduce cost long term (Taxpayer Advocate Service, n.d.).

6. INFORMATION TECHNOLOGY MODERNIZATION: Antiquated Technology Jeopardizes Current and Future Tax Administration, Impairing Both Taxpayer Service and Enforcement Efforts (Taxpayer Advocate Service, n.d.).

The IRS has made improvements in using software to analyze returns, they have not made the necessary improvements to the hardware. “ The IRS continues to operate the two oldest major IT systems still in use in the federal government, dating to the early 1960s” (Taxpayer Advocate Service, n.d.). The old computer systems/hardware is obsolete and hinders the taxpayer’s ability to obtain timely data from the IRS.

7.CORRESPONDENCE EXAMS: Taxpayers Encounter Unnecessary Delays and Difficulties Reaching an Accountable and Knowledgeable Contact for Correspondence Audits (Taxpayer Advocate Service, n.d.)

The current IRS correspondence audit requires the taxpayer to use the phone system that is currently inadequate. There is no single point of contact which decreases the overall customer service experience and reduces the ability for the taxpayer to build trust with the IRS (Taxpayer Advocate Service, n.d.).

8. INTERNATIONAL: The IRS’s Assessment of International Penalties Under IRC §§ 6038 and 6038A Is Not Supported by Statute, and Systemic Assessments Burden Both Taxpayers and the IRS (Taxpayer Advocate Service, n.d.)

The IRS is assessing penalties that are not supported under IRC §§6038 and 6038A and is causing undo stress and issues to taxpayers. The penalties are assessed immediately which leaves the taxpayers’ only recourse is to request a reasonable cause abatement and or seek a refund in federal court (Taxpayer Advocate Service, n.d.). over 71% in dollar amount of the penalties are being abated which is causing a waste of time, energy, and money on both the IRS and taxpayers part (Taxpayer Advocate Service, n.d.). Also, this will reduce the confidence the taxpayer has in the IRS’s ability to handle issues on time and accurately.

9. AMENDED RETURNS: The IRS Processes Most Amended Returns Timely But Some Linger for Months, Generating Over a Million Calls That the IRS Cannot Answer and Thousands of TAS Cases Each Year (Taxpayer Advocate Service, n.d.)

The process of amended returns and how they are processed needs to be changed as recommend by the TAS. The typical processing time for an amended return is currently 16 weeks if the return is not audited (Taxpayer Advocate Service, n.d.). Also, the IRS is not considering claims for refunds and issues a form letter rejecting the claim which causes increased unnecessary phone calls and cases filed at the TAS (Taxpayer Advocate Service, n.d.)

10. REFUND DELAYS: Taxpayers Whose Legitimate Returns Are Flagged by IRS Fraud Filters Experience Excessive Delays and Frustration in Receiving Their Refunds (Taxpayer Advocate Service, n.d.)

Last but not least, the IRS has pre-refund fraud filters that is delaying millions of legitimate claims for a refund (Taxpayer Advocate Service, n.d.). The IRS held 1.9 million returns for identity verification and 3.3 million to verify income and withholdings (Taxpayer Advocate Service, n.d.). Most of the claims were paid out with a significant delay and no information for the taxpayer on what was going on during the process. The IRS needs a better way of communicating these issues to the taxpayer or change the system of flagging returns.

Works Cited

Taxpayer Advocate Service. (n.d.). Most Serious Problems: 2020 Annual Report to Congress Taxpayer Advocate Service. Retrieved from Tax Payer Advocate Web Site: https://www.taxpayeradvocate.irs.gov/reports/2020-…

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