Asset Protection

Why I Don’t Feel Sorry for the IRS

Maybe I’m crazy, but I actually sympathize with employees of the IRS. They work for an agency that’s lost 14% of its employees and 18% of its funding since 2010. Money is so tight that many IRS employees must purchase their own office supplies.

At the same time, the IRS faces a huge increase in responsibilities. The agency must process more tax returns than ever. And Congress has tasked it with the job of implementing key aspects of two of the most complex pieces of legislation ever enacted: the Affordable Care Act and the Foreign Account Tax Compliance Act (FATCA). It’s also dealing with an explosion in tax-related identity theft cases.

While I feel for overworked employees, I have no sympathy for this organization that persists in some of the most short-sighted, boneheaded behavior imaginable. For instance, more than half of the IRS employees that the agency caught intentionally cheating on their taxes in 2016 were allowed to keep their jobs. And rather than taking steps to reduce employee workloads, during the Obama years, the agency created unnecessary additional work with a policy that targeted conservative-leaning non-profit organizations for scrutiny. 

Another Example of IRS Abuse

The IRS also persists in practices that are not only time-consuming, but also unlawful. One hot-button issue is the classification of workers by businesses.

A business can hire workers as employees or as independent contractors. Since using independent contractors means less paperwork and no tax withholding, businesses often prefer to hire contractors.

The IRS, on the other hand, believes many independent contractors should be reclassified as employees. The agency would prefer to collect tax from one employer rather than rely on dozens (or more) of independent contractors to file tax returns. In recent years, the IRS has aggressively targeted many employers and tried to reclassify the independent contractors they work with as employees. If the reclassification is successful, the employer must make payroll tax payments for the reclassified employees for the last three years, plus penalties and interest.

Until very recently, the IRS was able to legally collect tax from the reclassified workers as well. That’s right, the IRS was collecting the same taxes twice. But in April, all 16 judges comprising the US Tax Court made the common-sense ruling that the IRS shouldn’t be allowed to collect the same tax twice.

You might think that would be the end of it. And following the ruling would mean scarce IRS resources could be used elsewhere.

But that’s not what happened.

Instead, the IRS announced that it would follow the ruling only in court. It would continue to try to collect the same taxes twice unless the business sues the agency. That’s despite a unanimous ruling from the Tax Court barring the practice.

And Get This

Even when the IRS takes an initiative to reduce employee workloads, the result is taxpayer abuse. The recent initiative to turn over delinquent tax debts to private collection agencies is a great example.

The collection agencies the IRS hired must comply with federal and state debt collection laws. But they don’t seem to be doing that.

In June, four US senators wrote a letter to Pioneer Credit Recovery, one of the collection agencies. The letter alleges that Pioneer is violating both federal debt collection law and its contract with the IRS. For instance, Pioneer collection agents are pressuring taxpayers to pay overdue taxes by borrowing on credit cards, taking out a second mortgage, or even cashing in their retirement plans.

It Gets Worse

The IRS claims that the written guidance on the IRS website and in print publications isn’t legally binding.

This isn’t a new issue. Until 2014, IRS Publication 590, Individual Retirement Arrangements, informed taxpayers they could make one rollover per year from each of their IRAs. Alva Bobrow, a prominent tax attorney, relied on this published advice to rollover assets in his IRAs. The IRS contested the rollover and deemed the assets in the IRAs to be distributed. This resulted in a big tax bill for Mr. Bobrow and his wife.

Mr. Bobrow appealed the decision to the Tax Court. But the judge ruled that the rollover allowance applies to all of your IRAs combined. He even upheld the 20% underpayment penalty the IRS imposed against Bobrow and his wife.

Then in May of this year, the IRS Small Business/Self Employed Division (SB/SE) announced that the answers to “Frequently Asked Questions” on the IRS website are not legally binding. Basically, the IRS is saying, here’s what we think, but if we change our mind, you’ll pay the price. Nice work, guys.

So if you’re looking for sympathy for the IRS, you’ve come to the wrong place. Yes, the agency is underfunded and its employees are overworked. But it’s still very poorly managed.

The only real solution is a radical simplification of the bloated and needlessly complex Internal Revenue Code. A good start would be the plan proposed by Steve Forbes, Editor-in-Chief of Forbes Media: a 17% income tax for everyone, with generous exemptions for the poorest Americans. The death tax would be abolished, and the corporate tax rate would be dropped to 17%.

Forbes believes – and I agree – that this plan would give a big boost to the US economy.

Congress, are you listening?

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