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The “What Ifs” of an Economic Downturn

2011-01-08T07:52:00.001-08:00

Video: What If?

The Internal Revenue Service recognizes that many people may be having difficult times financially. There can be a tax impact to events such as job loss, debt forgiveness or tapping a retirement fund. If your income decreased, you may be newly eligible for certain tax credits, such as the Earned Income Tax Credit.

Most importantly, if you believe you may have trouble paying your tax bill contact the IRS immediately. There are steps we can take to help ease the burden. You also should file a tax return even if you are unable to pay so you can avoid additional penalties.

Here are some “What if” scenarios and the possible tax impact:

Related Item: Publication 4763, Job Related Questions During an Economic Downturn

Source IRS

Tax Relief in Disaster Situations

2011-01-08T07:50:00.003-08:00

Recent Tax Relief

North Carolina victims of September 2010 storms, flooding and straight-line winds, see News Release
Wisconsin victims of July 2010 severe storms, flooding and tornadoes, see News Release
Illinois victims of July 2010 storms and flooding, see News Release
Iowa victims of June 2010 severe storms, flooding and tornadoes, see News Release
Texas victims of Hurricane Alex in June 2010, see News Release
Kentucky victims of July 2010 storms and floods, see News Release
West Virginia victims of June 2010 severe storms and flooding, see News Release
Deadlines Extended for Certain Retirement Plans in Eight States

Don't See What You're Looking For? Around the Nation contains links to previously issued disaster relief.

The latest Federal Emergency Management Agency disaster declarations are available.

The IRS has two new fact sheets describing the impact of recently enacted laws on disaster relief:

For a definition of the Midwestern Disaster Area for Various Provisions of the Tax Extenders and AMT Relief Act of 2008, see Notice 2008-109

The Housing and Economic Recovery Act of 2008 offers a new option to homeowners who previously claimed a casualty loss deduction resulting from hurricanes Katrina, Rita and Wilma. See the news release, notice and questions and answers for further details.

Publications, FAQs and General Information See Disaster Assistance and Emergency Relief for Individuals and Businesses.

Ayuda por Desastres Paginas en español

Tax Relief for Hurricane Katrina, Rita and Wilma Victims The IRS offers tax assistance to victims of the 2005 Gulf Coast hurricanes.

Page Last Reviewed or Updated: October 15, 2010

Tax Benefits for Education: Information Center

2011-01-08T07:50:00.001-08:00

Audio file for Podcast

YouTube Video: English | Spanish | ASL

There is a variety of tax credits, deductions and savings plans available to taxpayers to assist with the expense of higher education.

A tax credit reduces the amount of income tax you may have to pay.
A deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay.
Certain savings plans allow the accumulated interest to grow tax-free until money is taken out (known as a distribution), or allow the distribution to be tax-free, or both.
An exclusion from income means that you won't have to pay income tax on the benefit you're receiving, but you also won't be able to use that same tax-free benefit for a deduction or credit.

Credits

American Opportunity Credit

Under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify over the next two years for a tax credit, the American opportunity credit, to pay for college expenses.

The American opportunity credit is not available on the 2008 returns taxpayers are filing during 2009. The new credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.

Special rules apply to a student attending college in a Midwestern disaster area. For tax-year 2009, only, taxpayers can choose to claim either a special expanded Hope credit of up to $3,600 for the student or the regular American opportunity credit.

If you have questions about the American opportunity credit, these questions and answers might help. For more information, seeAmerican opportunity credit.

Hope Credit

The Hope credit generally applies to 2008 and earlier tax years. It helps parents and students pay for post-secondary education. The Hope credit is a nonrefundable credit. This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. The Hope credit you are allowed may be limited by the amount of your income and the amount of your tax.

The Hope credit is for the payment of the first two years of tuition and related expenses for an eligible student for whom the taxpayer claims an exemption on the tax return. Normally, you can claim tuition and required enrollment fees paid for your own, as well as your dependents’ college education. The Hope credit targets the first two years of post-secondary education, and an eligible student must be enrolled at least half time.

Generally, you can claim the Hope credit if all three of the following requirements are met:

You pay qualified education expenses of higher education.
You pay the education expenses for an eligible student.
The eligible student is either yourself, your spouse or a dependent for whom you claim an exemption on your tax return.

You cannot take both an education credit and a deduction for tuition and fees (see Deductions, below) for the same student in the same year. In some cases, you may do better by claiming the tuition and fees deduction instead of the Hope credit.

Education credits are claimed on Form 8863, Education Credits (Hope and Lifetime Learning Credits). For details on these and other education-related tax breaks, see IRS Publication 970, Tax Benefits of Education.

Lifetime Learning Credit

IRS Enforcement Results

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IRS Enforcement Results: Click Here (pdf)

Return Preparer Compliance and Enforcement: Information Center

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Return Preparer Review

In 2009, the IRS launched a return preparer review to strengthen partnerships with tax return preparers and tax practitioners and ensure that all preparers and practitioners adhere to professional standards. On Jan. 4, 2010, the IRS released the results of its review, with proposals for the regulation of return preparers.

New PTIN Requirements for Tax Return Preparers
New Requirements for Tax Return Preparers: Frequently Asked Questions
Return preparer review report
IRS Letters and Visits to Return Preparers — Filing Season 2011

Civil and Criminal Actions

While most preparers provide excellent service to their clients, some unscrupulous return preparers file false and fraudulent tax returns and ultimately defraud their clients. When the IRS becomes aware of these, it works with the U.S. Department of Justice to obtain civil injunctions or to criminally prosecute such preparers. Find out more.

List of Criminal and Civil Actions 2010: Department of Justice press releases on civil and criminal actions taken as a result of IRS enforcement activities, including return preparer
List of Civil and Criminal Actions 2009: Department of Justice press releases on civil and criminal actions taken as a result of IRS enforcement activities, including return preparer
Abusive Return Preparer — Criminal Investigation: overview and other information on abusive tax return preparation
Examples of Abusive Return Preparer Investigations — Fiscal Year 2010: court case summaries

Guidance

This revenue procedure identifies the relevant categories of tax returns and claims for refund for purposes of the tax return preparer penalty under section 6694 of the Internal Revenue Code (Code), and identifies the returns and claims for refund required to be signed by a tax return preparer.

Guidance for tax return preparer signature requirements

Standards of Practice

The IRS' Office of Professional Responsibility establishes and enforces consistent standards of competence, integrity and conduct for tax professionals (enrolled agents, attorneys, CPAs and other individuals and groups covered by Circular 230. For more information, see:

Circular 230 Tax Professionals

For More Information

The IRS has issued a variety of information on tax return preparer compliance or enforcement issues and on the return preparer review.

Videos

Message for Tax Preparers | text

Webinars

New Requirements for Federal Tax Return Preparers — Learn the Who, What, When and How

Articles

Tips for Choosing a Tax Preparer

Fact Sheets

FS-2010-3, How to Choose a Tax Return Preparer and Avoid Preparer Fraud
FS-2010-1, Return Preparer Review Leads to Recommendations For New Requirements of Paid Tax Return Preparers

News Releases

IR-2010-118, IRS Continues Efforts to Ensure Accurate Return Preparation; Reminds Tax Preparers to Sign Up for PTINs
IR-2010-86, IRS Releases Proposed Regulations Related to Fees for Preparer Tax Identification Numbers
IR-2010-70, IRS presents IRS Live – New Requirements for Tax Return Preparers – Learn the Who, What, When and How
IR-2010-37, IRS Provides Guidance on Identifying Numbers for Tax Return Preparers
IR-2010-1, IRS Proposes New Registration, Testing and Continuing Education Requirements for Tax Return Preparers Not Already Subject to Oversight
IR-2009-80, IRS Seeks Comments from Software Industry and Unenrolled Preparers at Upcoming Public Forum to Improve Tax Preparer Standards
IR-2009-74, IRS Seeks Comments from Government Agencies at Upcoming Public; Forum on Proposals to Advance Tax Preparer Performance Standard
IR-2009-68, IRS Seeks Public Comment for Proposals to Boost Tax Preparer Performance Standards
IR-2009-66, Tax Preparer Review; Public Forums to Gather Input this Summer
IR-2009-57, IRS Launches Tax Return Preparer Review; Recommendations to Improve Compliance Expected by Year End

Tax Season 2010

2011-01-08T07:48:00.000-08:00

Following are news releases, fact sheets, tax tips, YouTube video and podcasts that publicize tax filing season 2010.

Fact Sheets

YouTube Video

Tax Filing Season 2010 — ENG | ASL | SPA
Choosing a Tax Preparer — ENG | SPA
Education Tax Credit, Claim It, Students — ENG | ASL
Education Tax Credit, Claim It, Parents — ENG | ASL
Energy Tax Credit, Claim It — ENG | ASL | SPA
Making Work Pay, Smaller Take Home Pay? — ENG
Making Work Pay, Claim It — ENG | ASL | SPA
New Homebuyer Credit, Claim It — ENG
New Homebuyer Credit, Claim It, Military — ENG
Phishing, Malware — ENG
Split Refunds, Savings Bonds — ENG | ASL | SPA
Vehicle Tax Deduction, Claim It — ENG | ASL
Withholding Calculator — ENG | ASL

Visit the IRS Channel on YouTube.

Podcasts

E-file and Free File — ENG | SPA

IRS podcasts are also available on iTunes.

Tax Season Starts on Time for Most Taxpayers; Those Affected by Late Tax Breaks Can File in Mid- to Late February

2011-01-08T07:47:00.001-08:00

IR-2010-126, Dec. 23, 2010

WASHINGTON — Following last week’s tax law changes, the Internal Revenue Service announced today the upcoming tax season will start on time for most people, but taxpayers affected by three recently reinstated deductions need to wait until mid- to late February to file their individual tax returns. In addition, taxpayers who itemize deductions on Form 1040 Schedule A will need to wait until mid- to late February to file as well.

The start of the 2011 filing season will begin in January for the majority of taxpayers. However, last week’s changes in the law mean that the IRS will need to reprogram its processing systems for three provisions that were extended in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on Dec. 17.

People claiming any of these three items — involving the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction as well as those taxpayers who itemize deductions on Form 1040 Schedule A — will need to wait to file their tax returns until tax processing systems are ready, which the IRS estimates will be in mid- to late February.

“The majority of taxpayers will be able to fill out their tax returns and file them as they normally do,” said IRS Commissioner Doug Shulman. “We will do everything we can to minimize the impact of recent tax law changes on other taxpayers. The IRS will work through the holidays and into the New Year to get our systems reprogrammed and ensure taxpayers have a smooth tax season.”

The IRS will announce a specific date in the near future when it can start processing tax returns impacted by the late tax law changes. In the interim, people in the affected categories can start working on their tax returns, but they should not submit their returns until IRS systems are ready to process the new tax law changes.

The IRS urged taxpayers to use e-file instead of paper tax forms to minimize confusion over the recent tax changes and ensure accurate tax returns.

Taxpayers will need to wait to file if they are within any of the following three categories:

Taxpayers claiming itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction extended in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted Dec. 17, which primarily benefits people living in areas without state and local income taxes and is claimed on Schedule A, Line 5. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
Taxpayers claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students — covering up to $4,000 of tuition and fees paid to a post-secondary institution — is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit.
Taxpayers claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23, and Form 1040A, Line 16.

For those falling into any of these three categories, the delay affects both paper filers and electronic filers.

The IRS emphasized that e-file is the fastest, best way for those affected by the delay to get their refunds. Those who use tax-preparation software can easily download updates from their software provider. The IRS Free File program also will be updated.

As part of this effort, the IRS will be working closely with the tax software industry and tax professional community to minimize delays and ensure a smooth tax season.

Updated information will be posted on IRS.gov. This will include an updated copy of Schedule A as well as updated state and local sales tax tables. Several other forms used by relatively few taxpayers are also affected by the recent changes, and more details are available on IRS.gov.

In addition, the IRS reminds employers about the new withholding tables released Friday for 2011. Employers should implement the 2011 withholding tables as soon as possible, but not later than Jan. 31, 2011. The IRS also reminds employers that Publication 15, (Circular E), Employer’s Tax Guide, containing the extensive wage bracket tables that some employers use, will be available on IRS.gov before year’s end.

Related Item: Forms Affected By the Extender Provisions

IRS Offers New Guidance on FSA and HRA Debit Cards

2011-01-08T07:46:00.001-08:00

IR-2010-128, Dec. 23, 2010

WASHINGTON — The Internal Revenue Service today issued new guidance allowing the continued use of health flexible spending arrangement (FSA) and health reimbursement arrangement (HRA) debit cards for the purchase of prescribed over-the-counter medicines and drugs.

The new guidance modifies previous guidance to permit taxpayers to continue using FSA and HRA debit cards to purchase over-the-counter medications for which the taxpayer has a prescription. Effective after Jan. 15, 2011, in accordance with the new guidance, this use of debit cards must comply with procedures reflecting those that pharmacies currently follow when selling prescribed medicines or drugs.

The procedures include requirements that a prescription for the medication be presented to the pharmacy or the mail-order or web-based vendor that dispenses the medication and that proper records be retained.

In accordance with the Affordable Care Act, the cost of over-the-counter medicines or drugs can be reimbursed from a health FSA or HRA if a prescription has been obtained. The requirement to obtain a prescription does not apply to insulin.

The prescription requirement applies to purchases made on or after Jan. 1, 2011, and not to purchases made in 2010 even if reimbursed after Dec. 31, 2010. Because the requirement applies only to over-the-counter medications, it does not apply to other health care expenses such as medical devices, eye glasses or contact lenses.

The new guidance, IRS Notice 2011-5, as well as answers to frequently asked questions on IRS.gov, also contain further details on health FSA and HRA debit card purchases, including purchases from health care providers other than pharmacies and mail order and web-based vendors.

For guidance on health FSA and HRA debit card purchases at “90 percent pharmacies,” see IRS Notice 2010-59. More information on health care reform provisions can be found on the Affordable Care Act page on IRS.gov.

IRS Announces 2011 Air Transportation Tax Rates

2011-01-08T07:45:00.001-08:00

IR-2010-129, Dec. 29, 2010

WASHINGTON — The Internal Revenue Service today announced the 2011 inflation adjustments to the excise taxes on air transportation.

Excise taxes apply to the domestic segments of taxable air transportation and to the use of international air facilities. The Airport and Airway Extension Act of 2010, Part IV, signed into law on Dec. 22, 2010, extends these excise taxes to air transportation that begins or is paid for no later than March 31, 2011.

These excise taxes are adjusted annually for inflation:

For 2011, the excise tax on the domestic segment of taxable air transportation is $3.70, unchanged from 2010.
The excise tax for 2011 for international flights that begin or end in the United States is $16.30, up from $16.10 in 2010.
The tax on use of international air facilities also applies at a reduced rate to departures of interstate flights that begin or end in Alaska or Hawaii. For 2011, the international air facilities tax on these flights is $8.20, up from $8.10 in 2010.

The new rates take effect Jan. 1, 2011.

Further details pertaining to the excise taxes on air transportation can be found in Form 720, Quarterly Excise Tax Return, and itsinstructions.

Source: irs.gov

IRS Kicks Off 2011 Tax Season with Deadline Extended to April 18; Taxpayers Impacted by Recent Tax Breaks Can File Starting in Mid- to Late February

2011-01-08T07:44:00.001-08:00

IR-2011-1, Jan. 4, 2011

WASHINGTON — The Internal Revenue Service today opened the 2011 tax filing season by announcing that taxpayers have until April 18 to file their tax returns. The IRS reminded taxpayers impacted by recent tax law changes that using e-file is the best way to ensure accurate tax returns and get faster refunds.

Taxpayers will have until Monday, April 18 to file their 2010 tax returns and pay any tax due because Emancipation Day, a holiday observed in the District of Columbia, falls this year on Friday, April 15. By law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have three extra days to file this year. Taxpayers requesting an extension will have until Oct. 17 to file their 2010 tax returns.

The IRS expects to receive more than 140 million individual tax returns this year, with most of those being filed by the April 18 deadline.

The IRS also cautioned taxpayers with foreign accounts to properly report income from these accounts and file the appropriate forms on time to avoid stiff penalties.

“The IRS has made important strides at stopping tax avoidance using offshore accounts,” said IRS Commissioner Doug Shulman. “We continue to focus on offshore tax compliance and people with offshore accounts need to pay taxes on income from those accounts.”

The IRS also reminded tax professionals preparing returns for a fee that this is the first year that they must have a Preparer Tax Identification Number (PTIN). Tax return preparers should register immediately using the new PTIN sign-up system available throughwww.IRS.gov/taxpros.

Who Must Wait to File

For most taxpayers, the 2011 tax filing season starts on schedule. However, tax law changes enacted by Congress and signed by President Obama in December mean some people need to wait until mid- to late February to file their tax returns in order to give the IRS time to reprogram its processing systems.

Some taxpayers – including those who itemize deductions on Form 1040 Schedule A – will need to wait to file. This includes taxpayers impacted by any of three tax provisions that expired at the end of 2009 and were renewed by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act Of 2010 enacted Dec. 17. Those who need to wait to file include:

Taxpayers Claiming Itemized Deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction that was also extended and which primarily benefits people living in areas without state and local income taxes. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
Taxpayers Claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students – covering up to $4,000 of tuition and fees paid to a post-secondary institution – is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit extended last month and the Lifetime Learning Credit.
Taxpayers Claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23 and Form 1040A, Line 16.

In addition to extending those tax deductions for 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Actalso extended those deductions for 2011 and a number of other tax deductions and credits for 2011 and 2012 such as the American Opportunity Tax Credit and the modified Child Tax Credit, which help families pay for college and other child-related expenses. The Act also provides various job creation and investment incentives including 100 percent expensing and a two-percent payroll tax reduction for 2011. Those changes have no effect on the 2011 filing season.

The IRS will announce a specific date in the near future when it can start processing tax returns impacted by the recent tax law changes. In the interim, taxpayers affected by these tax law changes can start working on their tax returns, but they should not submit their returns until IRS systems are ready to process the new tax law changes. Additional information will be available at www.IRS.gov.

For taxpayers who must wait before filing, the delay affects both paper filers and electronic filers. The IRS urges taxpayers to use e-file instead of paper tax forms to minimize confusion over the recent tax law changes and ensure accurate tax returns.

Except for those facing a delay, the IRS will begin accepting e-file and Free File returns on Jan. 14. Additional details about e-file and Free File will be announced later this month.

Many Ways to Get Assistance

The IRS is also continuing to focus on taxpayer service. Taxpayers with questions should check the IRS website at www.IRS.gov, call our toll-free number or visit a taxpayer assistance center.

This is also the first filing season that tax packages will not be mailed to individuals or businesses. There are still many options for taxpayers to get paper forms and instructions if they need them. In recent years, fewer and fewer taxpayers received these mailings. Last year, only 8 percent of individuals who filed tax returns received tax packages in the mail. Taxpayers can still get any forms and instructions they need online at www.IRS.gov, or they can visit local IRS offices or participating libraries and post offices.

In addition, individuals making $49,000 or less can use the Volunteer Income Tax Assistance program for free tax preparation and, in many cases, free electronic filing. Individuals age 60 and older can take advantage of free tax counseling and basic income tax preparation through Tax Counseling for the Elderly.

IRS Free File provides options for free brand-name tax software or online fillable forms plus free electronic filing. Everyone can use Free File to prepare a federal tax return. Taxpayers who make $58,000 or less can choose from approximately 20 commercial software providers. There’s no income limit for Free File Fillable Forms, the electronic version of IRS paper forms, which also includes free e-filing.

Check for a Refund

Once taxpayers file their federal return, they can track the status of their refunds by using the “Where's My Refund?” tool, located on the front page of www.IRS.gov. Taxpayers can generally get information about their refunds 72 hours after the IRS acknowledges receipt of their e-filed returns, or three to four weeks after mailing a paper return.

Taxpayers need to provide the following information from their tax returns: (1) Social Security Number or Individual Taxpayer Identification Number, (2) filing status, and (3) the exact whole dollar amount of your anticipated refund. If the U.S. Postal Service returns the taxpayer’s refund to the IRS, the individual may be able to use “Where’s My Refund?” to change the address the IRS has on file, online.

Also, taxpayers may complete a Form 8822, Change of Address, and send it to the address shown on the form. They may download Form 8822 from www.IRS.gov or order it by calling 800-TAX-FORM. Generally, taxpayers can file an online claim for a replacement check if more than 28 days have passed since the IRS mailed their refund.

National Taxpayer Advocate Delivers Annual Report to Congress; Focuses on Tax Reform, Collection Issues, and Implementation of Health Care Reform

2011-01-08T07:43:00.000-08:00

IR-2011-2, Jan. 5, 2011

WASHINGTON — National Taxpayer Advocate Nina E. Olson today released her annual report to Congress, identifying the need for tax reform as the number one priority in tax administration. The Advocate expressed continuing concern that the IRS’s increasing use of hard-core enforcement actions, particularly tax liens, is inflicting unnecessary harm on financially struggling taxpayers. The report also examines challenges the IRS is facing in implementing the new health care law.

TAX REFORM

“There has been near universal agreement for years that the tax code is broken and needs to be fixed,” Olson said in releasing the report. “Yet no broad-based attempt to reform the tax code has been made. This report documents the burdens the tax code imposes on taxpayers and explores why many taxpayers may nevertheless feel wedded to key aspects of the current system, undermining efforts at reform.”

Compliance Burdens. A TAS analysis of IRS data shows that taxpayers and businesses spend 6.1 billion hours a year complying with tax-filing requirements. “If tax compliance were an industry, it would be one of the largest in the United States,” the report says. “To consume 6.1 billion hours, the ‘tax industry’ requires the equivalent of more than three million full-time workers.”

Individual taxpayers find return preparation so overwhelming that about 60 percent now pay preparers to do it for them. An additional 29 percent use tax software, with leading software packages costing $50 or more. IRS researchers recently estimated that the annual monetary tax compliance burden of the median individual taxpayer (as measured by income) is $258.

Tax Reform Challenges and Public Awareness. The report discusses why efforts at tax reform – which usually focus on eliminating tax breaks in exchange for lower rates – have not succeeded. “It is sometimes suggested that taxpayers are looking for a free lunch – that they want to see lower tax rates but keep their tax breaks and retain their government benefits, all while balancing the budget,” Olson said. “But this perspective overlooks the fact that federal tax and spending policies are complex, and most people don’t have the time to study these policies in detail. Our aim is to improve public knowledge of the trade-offs involved and to help policymakers and the taxpaying public conduct a more informed conversation about tax reform alternatives.”

The report attempts to improve awareness of the extent to which taxpayers benefit from tax breaks by discussing the subject in detail. The report attempts to improve awareness of the connection between taxation and spending by recommending that the government provide all taxpayers with a “taxpayer receipt” each year that presents a breakdown showing how their federal dollars are spent.

“The Special Interests Are Us.” The report notes there is a widespread belief that the influence of entrenched “special interests” is the biggest roadblock to comprehensive tax reform. “There is no doubt that many provisions in the tax code benefit narrow groups of taxpayers,” the report says. “But the dirty little secret is that the largest special interests are us – the vast majority of U.S. taxpayers. Virtually all of us benefit from certain exclusions from income, deductions from income, or tax credits.”

These tax breaks (known as “tax expenditures”) now total $1.1 trillion a year. Among the largest are the exclusion of employer contributions for health care, the exclusion for retirement plan contributions and earnings, the mortgage interest deduction, reduced tax rates for dividends and capital gains, exclusions for Medicare benefits, the earned income tax credit, and the deduction for state and local taxes. Other popular benefits include the child and dependent care credits; the deductions for charitable donations and contributions to traditional IRAs; and exclusions for distributions from Roth IRAs, for distributions from Section 529 education savings plans, for contributions to Flexible Spending Accounts (both medical and dependent care), and for public transportation subsidies.

Tax Breaks Reduce Average Tax Liability by About $8,000 Per Return. A TAS analysis found that, on average, the tax liability of each individual who files a federal tax return is reduced by about $8,000 a year due to these tax breaks. Moreover, since tax is computed as a percentage of income, a taxpayer who pays a 25 percent tax rate could be benefiting from deductions or exclusions from income worth $32,000. The report presents an example of a fairly typical taxpayer who faces a 25 percent marginal tax rate on his “taxable income,” yet ends up paying an average tax rate of 9 percent on his “gross income” because of tax breaks.

“If tax rates are to be substantially lowered, many existing tax breaks will have to be eliminated immediately and others will be phased out,” Olson said. “But I believe most taxpayers will conclude this is a worthwhile trade-off. If tax reform proceeds on a revenue-neutral basis, the average taxpayer’s liability will not change, and we will end up with a tax system that is simpler, more transparent, and easier and cheaper for taxpayers to navigate.”

The report acknowledges that Congress may at some point raise tax revenues to address the nation’s long-term fiscal challenges. However, the report suggests that Congress first enact structural tax reform on a revenue-neutral basis and keep separate the decision whether to adjust tax rates.

“Zero-Based Budgeting” Approach Recommended. The report recommends that Congress approach tax reform in a manner similar to zero-based budgeting. The starting assumption should be that all tax breaks would be eliminated; a tax break would then be retained only if a compelling case can be made that the benefits of providing the tax break outweigh the complexity burdens it creates. The report suggests additional core principles for tax reform and summarizes key simplification proposals the Advocate’s office has made in past reports, including repealing the Alternative Minimum Tax for individuals and consolidating the number of incentives that encourage taxpayers to save for education and retirement.

Tax Reform Suggestion Box. The National Taxpayer Advocate is today launching a web page to solicit taxpayer suggestions regarding tax reform. “What would taxpayers be willing to give up if they knew that others are giving up their breaks and the end result would be a much simpler system?” Olson asked. “What particular provisions of the existing tax system are especially burdensome or seem particularly unfair?” Suggestions may be submitted at http://www.TaxpayerAdvocate.irs.gov. TAS will track suggestions and post results periodically.

IRS USE OF HARD-CORE ENFORCEMENT TOOLS, ESPECIALLY TAX LIENS

The report describes the Advocate’s continuing concern that IRS collection practices inflict unnecessary harm on financially struggling taxpayers and fail to achieve the IRS’s overriding objective of increasing long-term voluntary compliance with the tax laws.

“Tax collection requires a delicate balancing of the government’s interest in collecting revenue and ensuring that all taxpayers pay their fair share of tax, on the one hand, and protecting financially struggling taxpayers from unnecessary harm, on the other,” Olson said. “Current IRS policies do very little balancing. For example, IRS lien filing policies are all about ‘protecting the government’s interest’ and don’t consider the impact on the taxpayer.”

Financial Impact of Tax Liens. In FY 2010, the IRS filed liens against 1.1 million taxpayers. When the IRS files a notice of federal tax lien, the taxpayer’s creditworthiness can be badly damaged for the long term. Lien filings are picked up by the three credit rating agencies and remain on the taxpayer’s credit report for seven years from the date a tax liability is resolved, or longer if it is not resolved. ”Increasingly, employers, mortgage lenders, landlords, car dealerships, auto insurance companies, and credit card issuers utilize credit reports, so a tax lien has the potential to render someone unemployable, unable to obtain housing (owned or rented), and unable to obtain car insurance or a credit card, at least at reasonable rates, for many years into the future,” Olson said. A tax lien can be particularly devastating to small businesses, as it often cuts off their access to credit.

Several Million Taxpayers Affected. Over the past seven years, the IRS has filed more than five million tax liens. The report says that despite the high unemployment rate and the unusually large number of Americans who are experiencing financial difficulties, the IRS is continuing to ramp up the number of tax liens it files each year. The 1.1 million liens filed in FY 2010 compare with 168,000 in FY 1999, an increase of 550 percent.

Revenue Benefits of Tax Liens Unknown. The IRS does not have data that show whether, or to what extent, liens further revenue collection. A TAS study conducted in 2009 suggests there is a possibility that lien filings may reduce long-term tax collection. Notably, over the same period that lien filings have increased by 550 percent, annual revenue collected by the IRS’s Collection function on an inflation-adjusted basis has remained flat.

“By filing a lien against a taxpayer with no money and no assets, the IRS often collects nothing, yet it inflicts long-term harm on the taxpayer by making it harder for him to get back on his feet when he does get a job,” Olson said. “Absent data that show liens make a meaningful contribution to revenue collection and especially in this economy, I find it unacceptable that the IRS continues to torment financially struggling taxpayers in this way.”

Broader Use of Collection Alternatives Recommended. The report states that the IRS has taken steps in the last year to reassess its collection policies but concludes that more steps should be taken quickly. The report reiterates the Advocate’s longstanding suggestion that the IRS make greater use of collection alternatives, such as offers in compromise, when dealing with taxpayers who cannot afford to pay their liabilities in full. A comprehensive assessment of the IRS’s collection policy and a suggested roadmap toward a more effective approach are presented in Volume 2 of the report.

IRS CHALLENGES IN ADMINISTERING BENEFITS PROGRAMS, INCLUDING HEALTH CARE REFORM

IRS as Tax Collector. Historically, the IRS’s mission has been to collect taxes, but in recent years, Congress has directed the IRS to administer an increasing number of social benefits programs, including Economic Stimulus Payments, the First-Time Homebuyer Credit, and the Making Work Pay Credit. The recent directive to administer major aspects of the new health care law will add significantly to the IRS’s workload. “I am confident the IRS can succeed in its implementation of health care reform,” Olson said. “But a comprehensive assessment of the issues and challenges that lie ahead is a prerequisite for success.”

IRS as Benefits Administrator. The IRS will administer four key provisions of the new law: the Small Business Tax Credit, the Premium Assistance Credit, the Individual Responsibility Requirement, and the Employer Requirement. Among the challenges the IRS faces is determining the types of new information it needs to gather, determining the new entities it needs to work with, resolving privacy issues, and implementing a new definition of income, the report says.

“From an organizational standpoint, there are substantial differences between benefits agencies and enforcement agencies in terms of culture, mindset, and the skill sets and training of their employees,” Olson said. “As the IRS prepares to administer large portions of the health care legislation, it will have to shift from being an enforcement agency that primarily says, in effect, ‘you owe us’ to an agency that places much greater emphasis on hiring and training caseworkers to help eligible taxpayers receive benefits and work one-on-one with taxpayers to resolve legitimate disagreements.”

Revision to IRS Mission Statement Recommended. The report points out that the IRS has a “mission statement” that should serve as its foundation and around which its strategic plan, operational priorities, budget, and performance measures should be built. In light of the IRS’s expanded responsibilities, the report recommends that the IRS revise its mission statement to recognize explicitly its dual roles as tax collector and benefits administrator. Greater recognition of this dual role will enable the IRS to plan more effectively to handle health care and will make explicit to Congress that the agency will require sufficient funding to perform both of its functions effectively, the report says.

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Federal law requires the National Taxpayer Advocate to submit an Annual Report to Congress that identifies at least 20 of the most serious problems encountered by taxpayers and makes administrative and legislative recommendations to mitigate those problems. Overall, this year’s report identifies 21 problems, provides updates on four previously identified issues, makes dozens of recommendations for administrative change, proposes 11 recommendations for legislative change, and analyzes the 10 tax issues most frequently litigated in the federal courts.

About the Taxpayer Advocate Service

The Taxpayer Advocate Service is an independent organization within the IRS. TAS employees help taxpayers who are experiencing economic difficulties, such as not being able to provide necessities like housing, transportation, or food; taxpayers who are seeking help in resolving problems with the IRS; and those who believe an IRS system or procedure is not working as it should. If you believe you are eligible for TAS assistance, you can reach TAS by calling the TAS toll-free number at 877–777–4778 or TTY/TDD 800-829-4059. For more information, go to http://www.TaxpayerAdvocate.irs.gov.

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Source: IRS.gov