Wayne Jones Accounting Services

10/28/2022

Issue Number: IR-2022-192
Inside This Issue
IRS updates tax gap estimates; new data points the way toward enhancing taxpayer service, compliance efforts

WASHINGTON — The Internal Revenue Service today released a new set of tax gap estimates on tax years 2014 through 2016 showing the estimated gross tax gap increased to $496 billion, a rise of over $58 billion from the prior estimate.

The gross tax gap is the difference between estimated ‘true’ tax liability for a given period and the amount of tax that is paid on time. As discussed below, it is important to note that the tax gap estimates cannot fully account for all types of evasion.

"These findings underscore the importance of ensuring fairness in our nation’s tax system,” said IRS Commissioner Chuck Rettig. “The increase in the tax gap estimates reflects that the IRS needs to do more, both in improving taxpayer service as well as working to improve tax compliance. The IRS remains committed to ensuring fairness and helping taxpayers while also working to better identify emerging compliance issues that contribute to the tax gap. The recent funding addition will help the IRS in many ways, increasing taxpayer education, significantly improving service to all taxpayers and focusing on high-income/high-wealth non-compliance in a fair and impartial manner supporting compliant taxpayers.”

After late payments and IRS efforts collected an additional $68 billion, the IRS estimated the net tax gap was $428 billion. This increase in the tax gap can be attributed to economic growth.

Between the two periods, 2011-2013 and 2014-2016, the estimated tax liability increased by more than 23 percent.

The tax gap estimates translate to about 85% of taxes paid voluntarily and on time, which is in line with recent levels. The new estimate is a slight improvement from 83.7 percent in a revised Tax Year 2011-2013 estimate, which dipped slightly from the original estimate released earlier. After IRS compliance efforts are taken into account, the estimated share of taxes eventually paid is 87% for 2014-2016.

The gross tax gap comprises three components:

Nonfiling (tax not paid on time by those who do not file on time, $39 billion),
Underreporting (tax understated on timely filed returns, $398 billion), and
Underpayment (tax that was reported on time, but not paid on time, $59 billion).
A particular challenge for tax gap estimation is the time it takes to collect compliance data, especially data on underreporting that come from completed examinations (audits). To address this issue, the current release includes estimated tax gap projections for Tax Years 2017-2019.

Based on the projections for 2017-2019, the estimated average gross tax gap is projected to be $540 billion per year. The associated voluntary compliance rate is projected to be 85.1 percent. The projection of enforced and other late payments is $70 billion, which yields a net tax gap projection of $470 billion. The associated non-compliance rate projection is 87.0 percent.

The gross tax gap nonfiling, underreporting, and underpayment component projections for Tax Years 2017-2019 timeframe are $41 billion, $433 billion, and $66 billion respectively.

As part of the larger effort to reduce the actual tax gap, the IRS will continue to fairly enforce the tax laws. In 2021, the latest year for which data is available, the IRS currently collected more than $4 trillion in taxes, penalties, interest and user fees.

Tax gap studies through the years have consistently demonstrated that third-party reporting of income significantly raises voluntary compliance with the tax laws. And voluntary compliance rises even higher when income payments are also subject to withholding. The IRS also has an array of other taxpayer service programs aimed at supporting accurate tax filing and helping address the tax gap. These range from working with businesses and partner groups to a variety of education and outreach efforts.

The voluntary compliance rate of the U.S. tax system is vitally important for the nation. A one-percentage-point increase in voluntary compliance would bring in about $40 billion in additional tax receipts.

The tax gap estimates provide insight into the historical scale of tax compliance and to the persisting sources of low compliance.

"Keeping the voluntary compliance rate as high as possible ensures that taxpayers believe our system is fair," Rettig said. "The vast majority of taxpayers strive to pay what they owe on time. Those who do not pay their fair share ultimately shift the tax burden to those people who do, which fuels the tax gap. The IRS will continue to direct our resources to help educate taxpayers about the tax requirements under the law while also focusing on pursuing those who avoid their legal responsibilities."

Estimating the tax gap; offshore, digital assets, other categories not fully represented

Given the complexity of the tax system and available data, no single approach can be used for estimating each component of the tax gap. Each approach is subject to measurement or nonsampling error; the component estimates that are based on samples are also subject to sampling error. For the individual income tax underreporting tax gap, Detection Controlled Estimation is used to adjust for measurement errors that results when some existing noncompliance is not detected during an audit. Other statistical techniques are used to control for bias in estimates based on operational audit data. Because multiple methods are used to estimate different subcomponents of the tax gap, no standard errors are reported. In addition, those reviewing this data should be mindful of these limitations when using these estimates.

Given available data, these are the best possible estimates of the tax gap components presented, although they do not represent the full extent of potential non-compliance. There are several factors to keep in mind:

The estimates cannot fully represent noncompliance in some components of the tax system including offshore activities, issues involving digital assets and cryptocurrency as well as corporate income tax, income from flow-through entities, illegal activities because data are lacking.
The tax gap associated with illegal activities has been outside the scope of tax gap estimation because the objective of government is to eliminate those activities, which would eliminate any associated tax.
For noncompliance associated with digital assets and other emerging issues, it takes time to develop the expertise to uncover associated noncompliance and for examinations to be completed that can be used to measure the extent of that noncompliance.
The IRS continues to actively work on new methods for estimating and projecting the tax gap to better reflect changes in taxpayer behavior as they emerge.

Additional information:

Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2014–2016 (Publication 1415)PDF
Tax Gap Executive Summary (Publication 5364)PDF
Tax Gap Map (Publication 5365)PDF

09/15/2022

IRS's extra enforcement funding brings audit worries
By Michael Cohn
September 14, 2022, 4:41 p.m. EDT

The additional $80 billion in funding over the next decade for the Internal Revenue Service from the Inflation Reduction Act is supposed to go toward improving taxpayer service, modernizing the IRS's outdated technology, increasing enforcement efforts, and hiring more staff to process tax returns and replace retiring employees, but many taxpayers are concerned the funds will lead to more audits.

Treasury Secretary Janet Yellen and IRS Commissioner Chuck Rettig have both issued assurances that the funds won't be used for audits of taxpayers who earn less than $400,000 per year in line with pledges from the Biden administration and Democrats who passed the bill through a party line vote (see story). But the issue has become highly politicized, with Republicans on the Senate Finance Committee introducing legislation this week to stop the IRS from using the funds to audit taxpayers who earn less than $400,000 per year after failing to get such an amendment attached to the bill last month (see story). The bill's full text has not yet been released, but according to a summary, it would also temporarily prohibit the hiring of additional IRS employees "until a certain level of taxpayer services have improved, and for other purposes."

That could well hamstring the IRS at a time when it needs the extra resources to deal with the continuing backlog of unprocessed tax returns from earlier this year and last year, as well as the millions of tax returns that are expected to flood the agency from tax extensions. The IRS also has to deal with various other tax provisions from the Inflation Reduction Act, such as tax credits for renewable energy and electric vehicles, as well as implement the new "book tax" on billion-dollar corporations and the excise tax on corporate share buybacks. The IRS also has to at least carry out a study on implementing its own online tax filing system for taxpayers who have been unable to take advantage of the little-used Free File program it offers with the tax software industry.

That has left some tax pros skeptical that the IRS can avoid using the extra funding it receives to avoid doing any audits of taxpayers who earn less than $400,000 per year. A recent online poll by Sikich, a Top 30 Firm based in Chicago, asked a group of 250 owners and finance officers of midsized businesses about their attitudes toward the Inflation Reduction Act. When asked whether they believe the increased IRS enforcement activities will impact those with an income of less than $400,000 per year, 48 (19.2%) said no, but 202 (80.8%) responded yes.

"With the IRS getting that much additional funding and doing more audits, it's probably going to affect people at all levels and businesses as well," said Jim Brandenburg, a tax partner at Sikich.

The firm also asked which area of tax compliance concerns them the most with the increase in IRS funding and expected increase in compliance activity. It found that 83 (34.9%) were most concerned about business income tax, 26 (10.9%) were most concerned about Employee Retention Credit audits, while 129 (54.2%) were most concerned about personal income taxes.

However, Brandenburg doubts the dire warnings from Republicans about the IRS hiring an extra 87,000 agents to audit taxpayers will happen, pointing to the other needs at the IRS, including a wave of retirements at the overworked agency.

"They're going to lose quite a bit of their existing agents and other IRS officials in the next five years or so just through normal retirement," said Brandenburg. "They're trying to retain what they have now and deal with that, let alone try to add 87,000 more. It's going to be a tall order for them to be able to manage that in the next five to 10 years."

"They have to get more agents, but they have to put them in other places too," said Todd Simmens, technical practice leader of tax policy and legislation at Top 10 Firm BDO USA. "They've got to get folks to process returns, answer phone calls — lots of those things that are just not happening right now."

Electric vehicle tax credits

Sikich also asked about another provision of the Inflation Reduction Act, boosting the tax credits for electric vehicles, and found that about 80% don't have any plans to get one anytime soon, while about 17% do not own one, but are considering it and only 2% own an electric vehicle at this point. "You might have thought that there might be perhaps a few more looking at it, but, you know, 80% don't have it and aren't really looking at one at this point," said Brandenburg.

The electric vehicle tax credit expansion in the Inflation Reduction Act has some limitations, requiring automobile manufacturers to source the components mostly from the U.S. (see story).

"The EV credit is interesting when you peel back the onion on that one and really look at it," said Tom Alongi, an audit partner at UHY, a Top 30 Firm in Sterling Heights, Michigan. "As of today, there are maybe one or two vehicles that would actually meet the requirements of the bill. But new vehicles will be rolling out that will ultimately be favorably impacted by the credit. But 40% of the assembly and some of the battery content needs to be in the U.S. and that's going to increase to I think almost 80% in 2027. It's what we need to do to reshape manufacturing and the automotive sector to accelerate growth for EVs."

That will put pressure on automakers to speed up production on electric vehicles, which are already in heavy demand. "We're now in a race against time when you think of where we are in total EV production of the market of less than 3% of total vehicles to where we want to get to," said Alongi. "It probably won't be from a lack of demand. It will likely be really on the supply side. Over 57% of critical minerals are controlled by China, so we have a lot of catching up to do. There are obviously some incentives in the bill for minerals and mining, so that's going to be critical for us to build up that supply chain within the U.S. It's not going to happen overnight, but we're trying to accelerate it as fast as it can. Having owned an EV Tesla for more than three years, I can say that it is very viable. It's not for everyone, but we certainly can get to 40 or 50% of the market in 10 to 15 years."

The new requirements for the EV tax credit don't kick in until Jan. 1, 2023. To help tax pros advise clients on what to do in the meantime, the IRS quickly issued immediate guidance on the tax credit after passage of the legislation (see story).

Renewable energy incentives

Other energy-related provisions are in the bill to encourage greater use of renewable energy, but those may have a limited impact initially as well.

"For residences you can get a 30% credit for solar," said Alongi. "Well, there already was one. The credit this past year was 26%, so I don't know if the extra 4% really entices you to go out and put solar on your roof. They made a few changes to what's kind of the non-business credit, the 25C credit, for heat pumps. The limit is now $2,000 versus setting it at $1,200. There are some minor changes, but I don't know that those really move the needle. And the $60 billion in this bill that's set aside for — they label it as environmental justice — will it really spur lower-income neighborhoods to adopt solar and wind? I don't know."

The IRS will need to use the extra funding to formulate guidance on the tax credits and other tax provisions as well as improve service overall with the extra funding.

"The service levels you're getting at the IRS are terrible," said Simmens. "If they can get back to where they were years ago, I think a lot of the funding allocated correctly could get them there and it should. I'm reading about a lot of folks saying, oh, they're going to get 87,000 IRS agents. I do not believe that is what is going to happen or what is intended."

09/10/2022

https://babylonbee.com/news/accountant-at-party-realizes-too-late-that-person-asking-him-about-his-work-was-just-being-polite?utm_source=The%20Babylon%20Bee%20Newsletter&utm_medium=email

GREENVILLE, SC — This week, local man Connor Servaprof was excited when an acquaintance at a cookout asked him what it's like working as an accountant. Mistaking the inquiry for a genuine interest in the finer details of accounting, he began to regale the unfortunate man, failing to perceive his p...

08/30/2022

1.6 million taxpayers receiving special refunds, IRS announces: Do you qualify?
Source al.com

The Internal Revenue Service is refunding some $1.2 billion to taxpayers who paid late penalties during the COVID-19 pandemic.

The tax agency announced this week it was abating certain penalties for people and businesses who filed 2019 and 2020 returns late. It is also providing refunds or credits to some 1.6 million taxpayers who already paid the penalties.

Those payments will be completed by the end of September, the IRS said. The refunds will average about $750 per person, though some may receive more, some less. To qualify, individual tax returns must be filed by Sept. 30.

“Throughout the pandemic, the IRS has worked hard to support the nation and provide relief to people in many different ways,” IRS Commissioner Chuck Rettig said. “The penalty relief issued is yet another way the agency is supporting people during this unprecedented time. This penalty relief will be automatic for people or businesses who qualify; there’s no need to call.”

Taxpayers who file returns late without an extension typically pay penalties of up to 25%.

Penalty relief is not available in all situations, including where a fraudulent return was filed or when it was assessed as part of a compromise agreement and will only cover specific penalties. You can go here to see the complete list of qualifying penalties.

08/24/2022

IRS pledges not to use extra funding to audit lower-income taxpayers
By Michael Cohn
August 17, 2022, 4:59 p.m. EDT

Internal Revenue Service Commissioner Chuck Rettig is promising not to use the nearly $80 billion his agency will be receiving over the next 10 years to increase audits of small businesses or taxpayers who earn less than $400,000.

The Inflation Reduction Act, which President Biden signed into law Tuesday, allocates $79.6 billion to the IRS over the next 10 years. However, despite claims that the money will be used to hire 87,000 new IRS agents to audit taxpayers, Rettig is pledging to spend the money on other priorities.

"These funds will help us in many areas, including adding important resources for our tax enforcement, taxpayer service and technology," he said. "The act also includes a wide range of tax law changes that we will have to implement very quickly. This proposal creates opportunities for the nation's tax system in areas where we are challenged, helping us with needed resources to address large corporate and global high-net-worth taxpayers as well as pass-through entities and multinational taxpayers with international tax issues. To ensure fairness in the system, we need sophisticated, specialized teams in place that are able to analyze complex structures and identify noncompliance.

He insisted the money would not be used to audit lower-income taxpayers. "These resources are not about increasing audit scrutiny on small businesses or middle- or lower-income Americans," said Rettig. "As we've been planning, our investment of these enforcement resources is designed around the Treasury Department's directive that audit rates will not rise relative to recent years for households making under $400,000."

He noted that other resources would be invested in hiring, training and IT systems that will allow the agency to better serve all taxpayers, including small businesses and those seeking help with their taxes, and it will help the agency to continue its efforts to help people who are more comfortable using a language other than English understand and meet their tax obligations.

On Wednesday, the IRS made available the instructions for Form 8821, the tax information authorization form, in traditional Chinese. The agency also updated its priority guidance plan, with plans for updating its regulations and guidance to reflect statutory changes, including legislation predating the Inflation Reduction Act.

There are many other priorities for the IRS right now besides increasing tax audits. "They have to get more agents, but they have to put them in other places too," said Todd Simmens, technical practice leader of tax policy and legislation at Top 10 Firm BDO USA. "They've got to get folks to process returns, answer phone calls — lots of those things that are just not happening right now."

Treasury Secretary Janet Yellen sent a memo Wednesday to Rettig giving him six months to put together a plan for how the agency will use the extra funding (see story). However, Rettig's term is set to end in November, and it isn't clear yet who will succeed him.

Rettig indicated Tuesday that any changes won't happen right away. "Given the scope of the bill, keep in mind these changes will not be immediate," he said. "It's a 10-year plan, and it will take time to put these provisions into place. Make no mistake, we have a lot of hard work in front of us to deliver on the high expectations this historic funding will provide. But I have great confidence IRS employees are up to the task — and will deliver for the nation as they have countless times before in the history of our agency."

07/28/2022

The government appears once again ready to help us.

The legislation would direct the IRS to create software that would allow any taxpayer to prepare and file their individual income tax return beginning in tax year 2023.

07/22/2022

Issue Number: FS-2022-33
Inside This Issue
Understanding how the IRS contacts taxpayers; Avoiding scams and how to know it’s really the IRS reaching out

With continuing phone and in-person scams taking place across the country, the IRS wants to help taxpayers understand how and why agency representatives may contact taxpayers.

In most instances, the IRS sends a letter or written notice to a taxpayer in advance, but not always. Depending on the situation, IRS employees may first call or visit with a taxpayer.

Here’s how taxpayers can know if a person calling or visiting their home or place of business is a legitimate IRS employee or an imposter. There are special instances where an IRS revenue officer or revenue agent may visit a home or business related to an unpaid tax bill or an audit; the IRS urges people with tax issues to understand the circumstances around these visits and also help protect themselves against imposters.

Text messages: Frequently a scam

The IRS does not send text messages including shortened links, asking the taxpayer to verify some bit of personal information. These fraudulent messages often contain bogus links claiming to be IRS websites or other online tools. Other than IRS Secure Access, the IRS does not use text messages to discuss personal tax issues, such as those involving bills or refunds.

If a taxpayer receives an unsolicited SMS/text that appears to be from either the IRS or a program closely linked to the IRS, the taxpayer should take a screenshot of the text message and include the screenshot in an email to [email protected] with the following information:

Date, time and time zone they received the text message.
Phone number that received the text message.
The IRS reminds everyone NOT to click links or open attachments in unsolicited, suspicious or unexpected text messages whether from the IRS, state tax agencies or others in the tax community.

Email: Many tax scams involve email

The IRS does not initiate contact with taxpayers by email to request personal or financial information. The IRS initiates most contacts through regular mail. If a taxpayer receives an unsolicited fraudulent email that appears to be from either the IRS or a program closely linked to the IRS, report it by sending the email as an attachment to [email protected]. The Report Phishing and Online Scams page at IRS.gov provides complete details.

Mail and phone contacts are first steps with a tax issue

Taxpayers will generally first receive several letters from the IRS in the mail before receiving a phone call. However, there are circumstances when the IRS will call, including when a taxpayer has an overdue tax bill, a delinquent or unfiled tax return or has not made an employment tax deposit.

The IRS does not leave pre-recorded, urgent or threatening voice messages. Additionally, the IRS (and its authorized private collection agencies) will never:

Call to demand immediate payment using a specific payment method such as a prepaid debit card or gift card. The IRS does not use these methods for tax payments.
Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.
Ask for credit or debit card numbers over the phone.
All tax payments should only be made payable to the U.S. Treasury and checks should never be made payable to third parties. For anyone who doesn't owe taxes and has no reason to think they do: Do not give out any information. Hang up immediately. For more information, see IRS warning: Scammers work year-round; stay vigilant.

In-person visits: What to know

IRS revenue officers generally make unannounced visits to a taxpayer’s home or place of business to discuss taxes owed or tax returns due. Keep in mind this important point: Taxpayers would have first been notified by mail of their balance due or missing return. A limited exception involves revenue officer contacts while working a small number of “alert” cases, designed to help businesses from falling behind on withheld employment taxes before a balance due notice is created or mailed. Revenue officers are IRS civil enforcement employees whose role involves education, investigation and when necessary, appropriate enforcement steps to collect a tax debt. A revenue officer will help a taxpayer understand their tax obligations as well as the consequences for not meeting the obligations.

IRS revenue agents will at times visit an individual, business or non-profit who is being audited. That taxpayer would have first been notified by mail about the audit and set an agreed-upon appointment time with the revenue agent. Also, after mailing an initial appointment letter to a taxpayer, an auditor may call to confirm and discuss items pertaining to the scheduled audit appointment.

When visited by someone from the IRS, the taxpayer should always ask for credentials or identification. IRS representatives can always provide two forms of official credentials: IRS-issued credentials (also called a pocket commission) and a HSPD-12 card. The HSPD-12 card is a governmentwide standard form of identification for federal employees.

For more information, visit How to know it’s really the IRS calling or knocking on your door on IRS.gov, and the IRS Taxpayer Bill of Rights.

Helpful information on resolving tax issues

The IRS reminds individuals, businesses and non-profits with outstanding tax issues that there are a number of easy ways to get assistance and help them meet their tax obligations. The IRS encourages people to visit a special section on IRS.gov focused on payment options. These include paying taxes through an Online Account with IRS Direct Pay or paying by debit card, credit card or digital wallet. The IRS has options for people who can't pay their taxes, including applying for a payment plan on IRS.gov. Recently the IRS announced expanded voice bot options to help eligible taxpayers easily verify their identity to set up or modify a payment plan while avoiding long wait times.

Remember that the IRS will not:

Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes.
Demand a taxpayer pay taxes without the opportunity to question or appeal the amount they say they owe. Taxpayers should also be advised of their rights as a taxpayer.
Ask for credit or debit card numbers over the phone.
Threaten to bring in local police, immigration officers or other law-enforcement to have taxpayers arrested for not paying. The IRS also cannot revoke a driver’s license, business license or immigration status. Threats like these are common tactics scam artists use to trick victims into buying into their schemes.
Taxpayers who have filed a petition with the U.S. Tax Court may receive a call from an Appeals officer to discuss their tax dispute and options for resolution. During the call, the Appeals officer will provide their name, their badge number and their contact information including their phone number, e-fax, and e-mail address. The Appeals Officer will also know the docket number, as well as specifics regarding the case.

Appeals employees will never ask for credit card or banking information. If an Appeals officer cannot reach a taxpayer by phone, they may leave a general voicemail message. When an Appeals employee leaves a voicemail, they will include self-identifying information such as their name, title, badge number, and contact information.

Also, during this call, Appeals employees may ask taxpayers to submit additional documentation regarding their petition directly to the Independent Office of Appeals via mail, fax, or to an email address ending with .gov.

Also note, taxpayers can contact the Taxpayer Advocate Service, which is an independent organization within the IRS that helps taxpayers and protects taxpayers’ rights. They can offer taxpayers help if their tax problem is causing a financial difficulty, they’ve tried and been unable to resolve the issue with the IRS, or they believe an IRS system, process, or procedure just isn’t working as it should. Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778 for more information.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. We’re here to ensure that every taxpayer is treated fairly.

07/06/2022

Issue Number: Tax Tip 2022-102

All taxpayers should familiarize themselves with the Taxpayer Bill of Rights

By law, all taxpayers have fundamental rights when they’re interacting with the IRS. It’s important that all taxpayers know and understand their rights. The Taxpayer Bill of Rights presents these rights in 10 categories.

Here’s an overview of these rights. For full official details about each right, click the links below.

The right to be informed Taxpayers have the right to know what they need to do to comply with the tax laws.

The right to quality service Taxpayers have the right to receive prompt, courteous and professional assistance when working with the IRS and the freedom to speak to a supervisor about inadequate service.

The right to pay no more than the correct amount of tax Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly.

The right to challenge the IRS’s position and be heard Taxpayers have the right to object to formal IRS actions or proposed actions and provide justification with additional documentation.

The right to appeal an IRS decision in an independent forum Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including certain penalties.

The right to finality Taxpayers have the right to know the maximum amount of time they have to challenge an IRS position and the maximum amount of time the IRS must audit a particular tax year or collect a tax debt.

The right to privacy Taxpayers have the right to expect that any IRS inquiry, examination or enforcement action will comply with the law and be no more intrusive than necessary.

The right to confidentiality Taxpayers have the right to expect that their tax information will remain confidential.

The right to retain representation Taxpayers have the right to retain an authorized representative of their choice to represent them in their interactions with the IRS.

The right to a fair and just tax system Taxpayers have the right to expect fairness from the tax system. This includes considering all facts and circumstances that might affect their liabilities, ability to pay or provide information timely.
More Information:
Publication 1, Your Rights as a Taxpayer