Monday, March 7, 2016

IRS “Future State” Could be Sad State of Affairs

“Nothing is more certain than death and taxes.”  Certainly you’ve heard that expression.  These days there is a great deal of uncertainty as to the future of taxpayer relationships with the IRS.  National Taxpayer Advocate Nina Olson recently delivered her Annual Report to Congress.  In her report she refers to an IRS vision for its future role vis-à-vis U.S. taxpayers, which has become known as the Future State plan. 

Unfortunately, some of her conclusions align with our observations that suggest a more remote and less approachable – rather than a kinder, gentler – IRS.  Olson calls out proposed increases in IRS user fees, and the agency’s plans to reduce person-to-person contact and refer some common tax law inquiries to outside, paid professionals.  She sees this as likely to segregate taxpayers into haves and have-nots, those who can afford to pay for tax compliance assistance, and those who may find it beyond their means.  Olson refers to it as a “pay-to-play” policy, and uses as just one example the fee charged by the IRS for a taxpayer who needs to satisfy a tax obligation on an installment basis.  Not only is there a fee, but the IRS has proposed to make this option even more expensive.

There are other fees that provide dramatic examples of disadvantaging less affluent taxpayers.  For 2016 the IRS is eliminating its tiered fee structure for requesting relief – via private letter ruling – from the 60-day limit for completing an IRA or employer plan indirect rollover.  A number of circumstances beyond a taxpayer’s control – such as financial organization error, or ill health – can be, and often are, grounds for needing an extension of time to complete the rollover.  Some can be considered automatic, but others require IRS approval.

Last year a taxpayer with a rollover amount less than $50,000 could request such a ruling for $500.  This year it will cost $10,000; yes, that’s four zeros!  Those who can’t afford to obtain such IRS ruling relief could suffer serious tax consequences, in addition to diminishing their retirement nest egg, the accumulation of which is ostensibly an elevated public policy goal.  In its guidance outlining conditions under which such a rollover extension can be granted, the IRS cites as a guiding principle the concern that to do otherwise might be “against equity and good conscience.”  Hopefully, few of us will ever be at the mercy of the conscience that came up with this fee increase!

Lest I be accused of selectively citing only data critical of the IRS, the agency has reduced several of its fees for 2016, including those for retirement plans to correct certain failures through its Voluntary Correction Program, or VCP.  For those unfamiliar, under VCP a retirement plan sponsoring employer pays a fee, essentially owns up to the failures, and proposes to the IRS a remedy or remedies for its transgressions.  In this way the IRS both gathers fee revenue from participating employers, and in theory promotes greater plan compliance; all without expending time and expense in identifying and auditing those plans.  In virtually every case these fees decreased for 2016.  This, of course, could be interpreted as a carrot to promote even greater participation, and perhaps greater fee revenue overall.

One root of the problem seems to lie in the politics and funding war that is being waged between the IRS and Congress.  Apart from a long-term, deeply-rooted dislike some lawmakers have for the agency, there recently has been serious concern over IRS misuse of the tax-exempt organization rules to favor one end of the political spectrum over the other.  This unfavorable climate has led recent Congresses to punish the IRS with funding cuts.  In inflation-adjusted terms, the IRS has lost almost 20 percent of its budget since 2010.  This has led the agency to look for ways not only to cut expenses, but to raise revenues – apparently through raising user fees – on its own.

Not surprisingly, service levels have fallen, as well.  Although more than 80 percent of individual income tax returns are now filed electronically, compared to less than 55 percent a decade ago, a very complex tax code has led to increases – not decreases – in taxpayer requests for help on IRS Customer Service phone lines.  Such calls have increased 59 percent over this 10-year period.  And from 2014 to 2015 alone, calls to IRS Customer Service lines increased 15 percent.  Sadly, the number of callers who actually got through for help declined from 64 percent to 38 percent from 2014 to 2015.  The average time of answering, for those who got one, increased from 19 minutes to 30 minutes.  Hardly a service rate that would keep a private sector company in business for long.

Returning for a moment to the issue of increased fees, the cost for retirement plan document drafters to obtain IRS approval is proposed to go up steeply.  This includes the approval of a drafter’s basic plan document and adoption agreements.  Without resorting to a tedious breakdown, one major industry provider’s total fees for document approvals under the current Pension Protection Act restatement cost roughly $50,000, but would have cost in the neighborhood of $270,000 under the IRS’s 2016 fee schedule.  Under what authority is the IRS permitted to raise fees so egregiously?

Then there is the IRS’s unilateral decision to gut the determination letter program, basically delivering it to the industry as a fait accompli, rather than allowing input regarding its potential consequences for plan sponsors. 

Some might call this “piling on” an already beleaguered agency.  Others might say it is compelling evidence that the path we are on is not one that enhances, or even maintains, a healthy relationship between taxpayers and the agency with which they must regularly deal.  Congress and the IRS must come to an understanding that both provides adequate funding, and defines the relationship the IRS must maintain with taxpayers, both individual and business.