IRS News

Closing the Gap

How the IRS is improving compliance to close the tax gap

From Investment Advisor Magazine | August 2007 Issue
By Les Witmer

August 1, 2007
The primary goal of the Internal Revenue Service is to collect the taxes that are owed to the federal government under current tax law. Reducing the difference between taxes legally owed and taxes actually paid in a timely manner— referred to as the “tax gap”—is a key objective of the IRS’s collection and examination efforts. A recent Tax Talk Today Webcast featured an expert panel of tax practitioners and IRS officials discussing the IRS’s efforts to encourage voluntary compliance with tax law.


The IRS estimates that, for tax year 2001, the gross tax gap had reached $345 billion. Three categories of non-compliant taxpayers make up the tax gap:


• Non-filing—the taxpayer files returns late, or not at all;


• Underpayment—the taxpayer files on time, but does not pay the full tax liability;


• Underreporting—the taxpayer files on time, but does not report her correct tax liability, often by overstating exemptions and deductions, or understating income.


How does the IRS propose to close the tax gap? Among other moves, it is stepping up activities in examination and collection, as well as proposing new federal legislation. The latest numbers on federal tax enforcement illustrate the IRS’s commitment to improve in this area (see sidebar). Kevin Brown, deputy commissioner for services and enforcement and the acting IRS commissioner, said that overall revenues are up, and the IRS is “quite pleased” with the level of service provided to taxpayers in a time when enforcement activities are increasingly successful.


“We need a balance between service and enforcement,” said Brown. “We can’t neglect one at the expense of the other, and we’re constantly seeking to improve in both areas.”


Brown and other IRS officials list these areas slated for change.


1) Examination. The IRS plans to improve its examination processes with a focus on two broad categories: balanced audit coverage, based on patterns of noncompliance; and egregious noncompliance, which would include abusive transactions. Expect to see an emphasis on examinations of high-risk taxpayers— including small businesses, self-employed individuals, and high-income individuals —that often have more complex returns and have exhibited a noticeable degree of noncompliance in the past.


“All of these are again designed around the tax gap…where examination appears to be the best way in closing the tax gap,” said Steve Burgess, director of examination in the small business/self-employed division of the IRS.


2) Collection. Taxpayers of all kinds tend to ignore or deny initial collection notices from the IRS, but waiting doesn’t change anything except the total amount of interest and penalties.


“The same ways to resolve a case are available at any point in collection,” said David Alito, director of collection in the small business/self-employed division.


The IRS currently uses two private debt collection agencies to assist with collection activities, although there have been several hearings on the program. While collection activities appear to be in a positive trend right now, the IRS is constantly looking for ways to improve its processes.
“We know we’re not going to get there one case at a time in collections, so we’re trying to take a step back,” said Alito.


3) Legislation. The IRS has 16 legislative proposals included in President Bush’s 2008 budget that were designed to improve information reporting and thus encourage voluntary compliance with tax law. Two key areas that may be affected by this proposed legislation are credit and debit card receipt reporting by merchants and basis reporting for publicly traded securities that are reported for capital gains transactions. By bolstering information reporting, the IRS expects to see an improvement in compliance.


“We know that, where there is information reporting, compliance is just much higher,” said Mark Mazur, director, research, analysis and statistics, in the national headquarters of the IRS.

Issue Resolution With the IRS
Any discussion of IRS efforts to improve examination and collection should also include a look at what options are available for issue resolution, the topic addressed in another recent Tax Talk Today Webcast. Depending upon the issue at hand, a variety of options for interaction with the IRS are available. The panel of IRS officials and tax professionals examined some of the current resolution systems and how they work, in particular, the Taxpayer Advocate Service.


The Taxpayer Advocate Service operates independently of the IRS and offers two distinct options for resolving federal tax issues: case advocacy and systemic advocacy. The type of advocacy needed depends on the type of case in question.


In case advocacy, local taxpayer advocates work with the tax practitioner or the taxpayer to resolve individual cases. Typical qualifying cases usually involve economic burden, such as a person on a fixed, limited income placed under levy; or systemic burden, in which the taxpayer has encountered an IRS process that is not working as intended. Extreme processing delays might qualify as a systemic burden. To submit a case for consideration, simply file a completed Form 911 with the Taxpayer Advocate Service.


The Taxpayer Advocate Service’s Office of Systemic Advocacy addresses larger problems that may arise within the IRS and create multiple, recurring problems for taxpayers. Systemic advocacy even provides an Internet-based system which taxpayers and tax practitioners alike can use to report suspected systemic problems. The link for reporting systemic problems can be found at www.irs.gov/advocate, but remember, the Office of Systemic Advocacy is not for case-specific problems. Tax Talk Today panelist Benson Goldstein, technical manager, taxation, with the American Institute of Certified Public Accountants, commented that AICPA often receives calls from tax pros about supposed systemic problems that actually are case-specific and should be dealt with by filing a Form 911 with the Taxpayer Advocate Service. Under systemic advocacy, the Taxpayer Advocate Service also provides an annual report to Congress, presented by the National Taxpayer Advocate, on the 20 (or more) most serious problems affecting taxpayers.


For both case and systemic advocacy, the Taxpayer Advocate Service has the authority to issue Taxpayer Assistance Orders for the benefit of the taxpayer. But the IRS cautions that not every troubled case will receive assistance from the Taxpayer Advocate Service. “Not every interaction that a taxpayer has with the IRS is necessarily a Taxpayer Advocate Service case,” said Matthew Weir, director of advocacy projects, systemic advocacy, with the IRS’s National Taxpayer Service. “Not every IRS levy is going to result in a Taxpayer Advocate Service case.”


The Taxpayer Advocate Service also takes certain cases that meet public policy criteria, such as issues associated with the IRS’ new private debt collection initiative.


The Office of Taxpayer Burden Reduction, while not a specific issue-resolution solution for the individual taxpayer, focuses on identifying ways in which the IRS can alleviate taxpayer burden. This office of the IRS is responsible for form simplification, process simplification, and the identification of new regulations that would streamline the taxpayer’s engagement with the IRS. The Office of Taxpayer Burden Reduction also helps to develop new legislative proposals for the Department of Treasury to consider as additional ways to ease the taxpayer burden. More ideas are always welcome, according to the IRS. “We do look to our tax professionals to give us ideas on simplification initiatives,” said Beth Tucker, director of communications, liaison and disclosure in the IRS’s small business/self-employed division.

Estimated Tax Payments

A huge time saver for me has been using the federal and state government's websites to pay my estimated taxes. If you are not a wage earner and are required to make estimated payments, I encourage you to take the time to set up your accounts and make your payments electroncially. The following verbage is from the Federal website:

Welcome to EFTPS Online, the official Website of the Electronic Federal Tax Payment System (EFTPS). A free service provided by the U.S. Department of the Treasury, EFTPS allows all federal tax payments to be made electronically. This includes corporate, excise and employment taxes, and 1040 quarterly estimated tax payments. EFTPS Online is an official and secure United States Government System that allows business taxpayers to eliminate paper Federal Tax Deposit coupons and individual taxpayers to eliminate paper vouchers. All taxpayers can benefit by streamlined processing, therefore, saving time, postage costs and money.

The website link is https://www.eftps.com/eftps/

The website is user friendly and guides you in setting up your account. The really nice thing is that you can schedule all your payments in advance for the entire tax year and never have to worry about missing a payment--being on vacation etc...

The Franchise Tax Board's website is http://www.ftb.ca.gov/online/webpay/index.asp

Unfortunately, the State is not as user friendly as the Federal site but with a little bit of patience, you can do the same thing.

If you try setting up your account and need help, please call and either Cheryl or I can help you. It really has made my life a lot easier!

Market Volatility

We have been experiencing quite a bit of market volatility lately and I am so proud of all our clients as we have not had one anxious call or email. Many of you are old hats at this as you have gone through the 2000, 2001 and 2002 down markets. And your portfolios survived because you were nicely diversified among several different asset classes such as large cap growth and value stocks, small cap, mid size and international stock funds. And you were grateful that the boring bonds, CDs and money markets provided growth and stability during the rough times. Well, it is no different now. Even though it seems that we have had heart stopping days, the stock market is actually up since January 1st. The international funds are still strong performers and those bonds, treasuries and CDs have been great shock absorbers. Because we do annual rebalancing, you are not reacting to the market like the masses. You are an educated, disciplined and non-emotional investor. And those of you who are in 401ks etc... and dollar cost buying into the market now, you are getting some nice bargains. Kind of like the half-yearly sale at Nordstrom's. The ladies can relate to that one! So, congratulations to all of you for keeping the faith and holding on.

Balanced and Meaningful Life

I found this article to be especially good and would like to share with you. I feel very blessed because I love the work that I do and feel it is meaningful work. If you are not feeling that way, then let's get together and talk about it.

Judy


Pursuing a Balanced and Meaningful Life
Mitch Anthony

The greatest investment challenge facing our culture is not centered on how to obtain material resources but on how to invest our lives. Survey after survey affirms the idea that the limited bucket of time carried by most Americans has a noticeable leak. The majority of respondents feel a constant stress and list having more personal time as a top priority. As people mature (when their “time” bucket is less than half full), they begin to notice this performance in their reservoir of time (an awareness of their mortality). When asked what they would do with their increased personal time, most respondents pointed to family, leisure, and activities that give them a sense of connectivity and meaning. Many midlife professionals speak of being tired of deferring satisfaction to a later date in life. Some are on their second family—having seen the price one often pays in all-consuming careers.

Advisor and author, Karen Ramsey, has captured this sentiment.

“Few people are able to find total satisfaction and contentment in work alone. We also need relationships with others in our lives—and the time needed to invest in those relationships. We often find ourselves too busy to spend time with those we love, and the rewards of our long hours of toil are rarely sufficient to fill the resulting void. To find harmony and balance in our lives, we may need to implement changes. That may mean doing what we want, rather than what everyone else expects.”

A job can be defined as a trade in which we exchange our time for someone else’s money. The fairness of that trade should be under constant scrutiny. The impact of that trade on other important aspects of our lives should be a point of perpetual examination. When people say they are feeling stressed and need more balance in their lives, they are really admitting that they have surrendered the locus of control of their most precious commodity—time. Would these same individuals give up control of their material assets and complain about the resulting stress and hopelessness of their predicament? Wise investors understand that time and energy also contains the seeds of compounding wealth. What is the point of putting your money in aggressive growth funds while your time and energy are in the equivalent of passbook savings or, worse, a losing enterprise?

Maybe what people are saying is that they are waking to the realization that it is not just the money that they want—there are more lasting prizes to be had. We have found that oftentimes these people are waiting for someone to “give permission” to think this way.

Author Mark Eisenson demonstrates that the investment metaphor cuts incisively to the soul of the materially focused but perplexed individual. He writes:

“Quality of life means different things to different people—each person’s definition is unique. But the important thing to realize is that your life is multifaceted and each facet contributes to the quality of life you experience. Each facet is an integral part of your “life portfolio” and your investments of time and energy are how you make that portfolio grow. Are they experiencing the “value” for your investment that you should expect? If not, it’s time to reevaluate and rebalance your portfolio. In the same way that a Wall Street investment appreciates in value, you want your investments of time and energy to offer high yields. They should make you feel good—happy, satisfied, energized, or relaxed. If you’re really lucky, they may even make you money.”

Like a sense of balance, our sense of meaning is also affected by our time investments. The word meaning can be abstract and difficult to define, leading to deep philosophical questions such as, “What is the meaning of life?” However, in terms of financial life planning, the more practical question is, “What is meaningful to me?” In other words, as clients design their future, the top criterion for investing time should be to spend time in a way that is meaningful.

Whether paid or unpaid, it is especially important that each individual’s work enhances his self-worth and personal identity. Do you know of any advisors who, although successful, seem not to be enjoying what they do? Such demeanors are often symptomatic of a disconnect at this level. Author Barbara Sher explains that the first step to finding work that “fits” you—in other words, matches your skills, interests, values and preferences—is to understand the connection between doing what you love and doing something worth doing. At that intersection you will find meaning. Sher writes: “When something really matters to you, you must bring it into your life. It’s a tribute to the success of our culture that so may of us have freedom to search for our own life’s work.”

We have found that a majority of those who do not possess this freedom have also compromised their freedom in the realm of financial decisions. By borrowing and spending too much, by making ill-guided investment choices and strategies, and by neglecting to bring their financial lives under analysis and control, these individuals have delayed or abandoned their quest for meaning. This is where a good financial life planner can make all the difference in the world. First, help clients think about locating the intersection where meaning will be found. Second, help clients align their financial lives with the objective of reaching that destination. Without a clear vision of the destination, the process rings hollow and will be compromised by every impulsive whim and wind of influence.

Excerpted from Your Clients for Life: The Definitive Guide to Becoming a Successful Financial Life Planner, Second Edition by Mitch Anthony. (©2006 by Mitch Anthony. Published by Kaplan Publishing