October 23, 2013

Yesterday, Nina E. Olson, the National Taxpayer Advocate, released a report to Congress that identifies the priority issues the Taxpayer Advocate Service (TAS) will focus on this year. Below I have cut and pasted a summary of some items presented:

Impact of Changes in Tax Law on Taxpayers and the IRS. "The continual enactment of significant tax law and extender provisions late in the year has led to IRS delays in handling millions of taxpayers' returns and caused many taxpayers to underclaim benefits because they did not know what the law was," Olson wrote. "Because of the magnitude of these challenges and the uncertainty about such a large number of important provisions, the 2013 filing season is already at risk. The 2013 filing season is likely to pose problems for many (if not most) taxpayers and the IRS if Congress does not address the many provisions that have already expired or soon will."

Expired Tax Provisions. Among tax provisions that expired at the end of 2011 are the following:

  • The so-called "AMT patch." As result, an estimated 27 million more taxpayers are subject to the Alternative Minimum Tax this year.
  • The deduction for state and local taxes. About 11 million taxpayers claimed this deduction last year.
  • The deduction for mortgage insurance premiums. About four million taxpayers recently claimed this deduction.
  • A provision allowing persons over age 70-1/2 to make tax-free withdrawals from their Individual Retirement Accounts (IRAs) to make charitable contributions.
Congress is likely to extend many of these and other expired provisions retroactive to January 1, 2012, but neither taxpayers nor the IRS know for certain what will happen and therefore cannot make plans. For example, a homebuyer trying to decide whether to utilize a loan package that includes mortgage insurance now lacks important information. So does a pensioner trying to decide whether to tap his IRA to make a charitable donation.

Expiring Tax Provisions. In addition to the provisions that expired at the end of 2011, an even larger number of provisions are set to expire at the end of 2012, including the Bush-era cuts in marginal tax rates, reduced tax rates on dividends and long-term capital gains, various marriage penalty relief provisions, certain components of the child tax credit, the earned income tax credit, and the adoption credit, and the moratoria on the phase-outs of itemized deductions and personal exemptions.

"An aura of uncertainty prevails as the IRS and taxpayers wait for word about what will be the law governing us this year and for the near future," Olson wrote. "This uncertainty affects the IRS's ability to smoothly administer the filing season and taxpayers' ability to make plans."

Impact of Tax Fraud and Tax-Related Identity Theft. Tax fraud and tax-related identity theft, although distinct problems, often overlap and present similar challenges for taxpayers and the IRS. Both problems are growing. In FY 2011, the IRS's Electronic Fraud Detection System (EFDS) identified more than one million returns as potentially fraudulent, a 72 percent increase from the previous year. The IRS blocked nearly one million additional refund claims using other means. While not all fraudulent returns involve identity theft, many do. The IRS recently reported an inventory of more than 450,000 identity theft cases.

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

IRS CIRCULAR 230 NOTICE:

As required by U.S. Treasury Regulations, please be advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.