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IRS ENFORCEMENT

IIt’s pretty clear that Congress is trying to complete an overhaul of the tax system. As the weeks go by, we’re getting more signals that clarify where the lawmakers are headed. One thing clear is that they are going to include measures to enforce compliance. In other words, they want to strengthen the consequences.

One of the prior ideas for tax reform is to broaden the income tax base so the maximum tax rates can be lowered and the number of tax brackets can be reduced. Congress is looking at compliance changes in order to reduce the tax gap. The IRS wants to use increased revenue in order to help cut tax rates and/or retain deductions in tax credits that are popular.

The Senate Finance Committee had several ideas to encourage reduction of the tax gap. One of those ideas at the top of the list is increasing the amount of money available to the IRS for tax enforcement. In other words, they want the IRS to do additional audits to bring in more revenue. This means the IRS will be looking to hire more auditors. It will take time to train them and get them to the point where they will actually bring in additional money.

Keep in mind in the long term, once those additional auditors are in place, more taxpayers will be audited and, let’s face it, the idea of the audit is to catch mistakes and/or intentional errors ultimately to bring in more revenue for the government which means more money from the taxpayers.

Second on the list is expanding the requirement for additional information to be provided by the taxpayer. For example, it looks like the government is going to require more detailed information for tax returns that claim a home mortgage interest deduction. The whole idea behind this is to help the Service monitor mortgage interest deductions.

Also high on the list is a new requirement making sure that small businesses are filing 1099’s for subcontractors they hire. This is suddenly important because of a Government Accountability Office report that many individual business owners are not filing 1099 forms when they use contract labor.

Eliminating Identity Theft: Congress is also working on ways to restrict access to Social Security numbers, specifically, those contained in a federal list of recently deceased individuals. This would help the Service combat fraudulent tax return filings.

Additional Tax Overhaul Considerations: Congress is also working with the idea of allowing IRS to levy payments made by Medicare to providers that have tax delinquencies. Also, the IRS will probably be given more time to process refunds before they have to pay interest on those refunds.

Finally, Congress is working on revoking or denying passports to seriously delinquent taxpayers.

Keep in mind these are just ideas that are being floated now. The whole tax reform debate is just ramping up and it will be a long time before a serious law is enacted.