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Improper EITC payments, IRS needs to improve

Treasury Inspector General for Tax Administration logo

On December 29, 2014 the Treasury Inspector General for Tax Administration (TIGTA) reported on IRS’ efforts to reduce earned income tax credit (EITC) payments made in error. While the percentage of improper payments is down, the total is still up. From $10.5 billion for 2003 to $14.5 billion for 2013. That is about 24% of all EITC payments for 2013. The EITC is a tax credit to encourage (or reward) lower income workers for working. About 80% of taxpayers eligible for the EITC applied for it in 2010.

TIGTA also reports on problems with the Additional Child Tax Credit. Here the improper payment rate is estimated as between 25.2% and 30.5% or $5.9 to $7.1 billion. Not small change but less than gross dollar amounts improperly paid for EITC.

In no particular order, some of the problems are:

  • Congress made the rules for qualifying for the EITC extremely complex and then directed the benefits to the working poor who are less able to afford assistance to make sure they follow the rules.
  • There is no easy way for IRS to verify, short of an audit, compliance with many of the EITC rules. It is fairly easy for IRS to catch you if you do not report a stock sale as IRS gets a report from your stock broker. How is the IRS to police your home address to make sure there are not two people living together but using different addresses to hide that fact?
  • IRS is charged with administering a program to assist the working poor. Perhaps it would be better to have the Department of Health and Human Services run the EITC program. DHHS is in charge of other programs for the poor, such as Aid to Families with Dependent Children. You could say something similar about the Affordable Care Act – why not have it administered by DHHS? What does IRS know about healthcare?
  • It is difficult to cost justify auditing all questionable claims due to the time required versus the relatively low return. For example, in 2011 IRS found 6.6 million questionable EITC claims totaling $21.6 billion. That is a little less than $3,300 per questionable claim. Not all the questionable claims would result in erroneous payments. Of a limited enforcement budget, how much should IRS spend to collect $3,300? Would it be better to spend that IRS money going after a larger underpayment?
  • Congress will not give IRS access to DHHS’ new hire database so IRS can crosscheck to see if claimants are really working.
  • Who is eligible changes due to the change in taxpayers circumstances. For example, in the great recession many middle class people involuntarily shifted to part-time low wage jobs and became eligible for the first time. After getting a new job they ceased to be eligible.
  • Refundable credits, such as the EITC and the Child Credit attract fraudulent taxpayers and fraudulent tax preparers.

You can find the entire report here and another TIGTA report here.

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IRS writing in Klingon?

Klingon Signs at the station by Ewen Roberts, on Flickr

After browsing the Treasury Inspector General for Tax Administration (TIGTA) audit of IRS letters and notices, perhaps Klingon would be easier for the average American taxpayer to understand. On October 14, 2014 TIGTA released its audit report (html press release) on how IRS is complying with the Plain Writing Act. In summary, the report says IRS is failing miserably. Half the IRS letters and two-thirds of the IRS notices were not clear or did not provide “sufficient information.” In my experience the IRS letters and notices are not only not clear but they also do not provide sufficient information. Perhaps the press release should have used “and” instead of “or.” Maybe IRS writing in Klingon is a better solution. At least then, most people would not expect to understand the IRS.

According to TIGTA, IRS sent almost 63 million letters and notices in fiscal year 2013. So if half to two-thirds of the letters and notices were confusing that means there are a lot of confused U.S. taxpayers. Confusion does not help IRS administer the tax laws fairly nor does it breed confidence in the fairness of the tax law or the competency of the IRS.

In my experience, some IRS written communications are very vague and short. Most are plenty long but not very helpful. Sadly, the same can be said for most state tax department letters and notices. I realize the government wants to cover every eventuality, but at some point clarity should trump completeness. I am looking at a seven page notice that essentially says: “Someone reported they paid you $XXXX.XX in income and you only reported $XX.XX, please explain.” Only it takes IRS seven pages to say that and then they scare the taxpayer by telling them how much more tax they owe if the other party is correct. This is the main reason I include an hour of time in my preparation to respond to such notices. Otherwise, the client may assume they owe what IRS says they owe and send it in to avoid having to also pay me to explain the notice. Unfortunately, IRS notices and letters are quite often wrong or partly wrong.

What can taxpayers learn from this report? If the taxpayer does not understand the notice, contact their tax preparer or the appropriate government agency and pursue the issue until they understand. You may still not be happy with the results but at least you will at least know whether or not you owe any additional tax.

 

 

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Expired tax provisions, will they return?

Courtesy of www.TaxRebate.org.uk, license under CC.

The Joint Committee on Taxation lists 55, yes 55, tax provisions that expired December 31, 2013.  Their report (PDF) also includes a list of tax provisions expiring in 2014 and future years.  Will Congress renew them all, some of them or none of them? My comments are in italics. Selected expiring provisions:

  1. Credit for certain nonbusiness energy property (Residential energy credit – e.g. for a qualifying central air and heat system.)
  2. Tax credit for research and experimentation expenses
  3. Employer wage credit for activated military reservists
  4. Work opportunity tax credit (Did the unemployed all disappear?)
  5. Deduction for certain expenses of elementary and secondary school teachers (Perhaps having the schools pay for classroom supplies would be a better choice.)
  6. Discharge of indebtedness on principal residence excluded from gross income of individuals
  7. Deduction for qualified tuition and related expenses
  8. Additional first-year depreciation for 50 percent of basis of qualified property (Failing to renew this one will raise a lot of employers’ income taxes.)
  9. Premiums for mortgage insurance deductible as interest that is qualified residence interest (An income tested deduction many did not receive. Some people argue this deduction encourages people to buy more house than they can afford, others say the exact opposite – it allows people to buy a house who would not otherwise qualify.)
  10. Deduction for State and local general sales taxes (Shouldn’t this have applied to everyone? Not just to those in a state without an income tax.)
  11. 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
  12. Increase in expensing to $500,000/$2,000,000 and expansion of
    definition of section 179 property (Another one that will cost employers’ a lot of income tax if not renewed.)
  13. Tax-free distributions from individual retirement plans for charitable purposes

Did we ever need these?

  1. Credit for certain expenditures for maintaining railroad tracks (Railroads will not maintain their tracks unless the taxpayers help? Maybe there should be a credit for getting the oil changed in my car.)
  2. Credit for energy efficient appliances (manufacturer got this credit)
  3. Mine rescue team training credit (Really? Shouldn’t this be a requirement?)
  4. Election to expense advanced mine safety equipment (Apparently, the miners have a great lobby. Safety should be part of their mission, not something taxpayers should have to pay them to do.)
  5. Three-year depreciation for race horses two years old or younger (Wonder how many “jobs” this created?)
  6. Seven-year recovery period for motorsports entertainment complexes (Really? NASCAR needs special tax breaks when it is already the largest sport in the U.S.?)
  7. Placed-in-service date for partial expensing of certain refinery property (Subsidies for refiners?)
  8. Special expensing rules for certain film and television productions (I guess producers and movie stars are not paid enough.)

Here are the rest:

  1. Credit for health insurance costs of eligible individuals (Credit mainly for people who lost their job due to a “trade adjustment” – job shipped offshore – or whose employer went bankrupt and the government has taken over the former employer’s pension obligations.)
  2. Alternative fuel vehicle refueling property (non-hydrogen refueling property)
  3. Credit for two- or three-wheeled plug-in electric vehicles
  4. Second generation biofuel producer credit (formerly cellulosic biofuel producer credit)
  5. Incentives for biodiesel and renewable diesel
  6. Determination of low-income housing credit rate for credit allocations with respect to non-federally subsidized buildings
  7. Beginning-of-construction date for renewable power facilities eligible to claim the electricity production credit or investment credit in lieu of the production credit
  8. Treatment of military basic housing allowances for low-income housing credit and for qualified residential rental project exempt facility bonds
  9. Credit for production of Indian coal
  10. Indian employment tax credit
  11. New markets tax credit
  12. Credit for construction of new energy efficient homes (Builder got credit.)
  13. Qualified zone academy bonds: allocation of bond limitation
  14. Parity for exclusion from income for employer-provided mass transit and parking benefits
  15. Accelerated depreciation for business property on an Indian reservation
  16. Election to accelerate AMT credits in lieu of additional first-year depreciation
  17. Special depreciation allowance for second generation biofuel plant property
  18. Special rules for contributions of capital gain real property made for conservation
    purposes
  19. Enhanced charitable deduction for contributions of food inventory
  20. Energy efficient commercial buildings deduction (This was small in comparison to the additional cost. I doubt it really incentivized many people to build energy efficient buildings but I am sure those that did liked the credit.)
  21. Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico
  22. Special rule for sales or dispositions to implement Federal Energy Regulatory Commission (“FERC”) or State electric restructuring policy
  23. Modification of tax treatment of certain payments to controlling exempt
    organizations
  24. Treatment of certain dividends of regulated investment companies (“RICs”)
  25. RIC qualified investment entity treatment under the Foreign Investment in Real Property Tax Act (“FIRPTA”)
  26. Exceptions under subpart F for active financing income
  27. Look-through treatment of payments between related controlled foreign corporations under the foreign personal holding company rules
  28. 100-percent exclusion for qualified small business stock
  29. Basis adjustment to stock of S corporations making charitable contributions of  property
  30. Reduction in S corporation recognition period for built-in gains tax
  31. Empowerment zone tax incentives
  32. Incentives for alternative fuel and alternative fuel mixtures (other than liquefied hydrogen)
  33. Temporary increase in limit on cover over of rum excise tax revenues (from $10.50 to $13.25 per proof gallon) to Puerto Rico and the Virgin Islands
  34. American Samoa economic development credit

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Voluntary preparer program a waste of money!

On June 26, 2014 IRS announced the creation of a voluntary program to focus on continuing education for unenrolled tax preparers. Essentially it is a program for the approximately 60% of preparers who are not attorneys, CPAs, Enrolled Agents, or Enrolled Actuaries. These preparers already have good options for continuing education and other assistance.

Some organizations “unenrolled” preparers can join:

Many groups offering continuing education to CPAs, attorneys, enrolled agents and actuaries will allow anyone to attend their seminars. Most of the seminars are not free but that should not stop good and ethical preparers from attending. Unenrolled preparers can always go through the process of becoming enrolled agents. No college education required. The NAEA has plenty of resources for those interested in becoming enrolled agents.

Who does IRS think will join the voluntary group? The shady preparers will not join or if they do join they will figure some way to game the system to “prove” they completed the required course work. If IRS really wants to reduce the “bad” preparers, then they should go after them with their existing powers. The IRS should also ask Congress to give them the power to ban “bad” preparers from preparing federal income tax returns.

A better use of the money would be for IRS to put it into customer service. Maybe they could answer their phones in under two hours.