IRS Releases Strategic Operating Plan

The IRS released a strategic operating plan (April 6) with 190 “key projects” intended to improve service and address tax avoidance by high-income earners. Many of the activities will be funded using an $80 billion funding infusion for the agency provided in the 2022 Inflation Reduction Act.

The IRA plan is built around three core elements:

• Rebuilding and strengthening IRS customer service to end long phone wait times, add online tools, and add in-person taxpayer assistance.

• Add capacity to better understand and audit the complex filings of high-income taxpayers, large corporations and complex partnerships.

• Update outdated IRS systems to help ensure the most modern and robust security in technology to protect taxpayer data.

Overall, the plan contains 42 initiatives covering more than 190 key projects and more than 200 milestones and milestone timeframes to track progress.

(posted: 4-7-23)

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House Republican Tax System Proposal

House Republicans are contemplating consideration of an income tax replacement system.

The proposal–The Fair Tax Act (HR 25)–would completely replace the Federal income tax system with a “consumption,” or sales tax, totaling 30%. The Federal Government currently does not assess any sales taxes. Current sales taxes are only assessed at state and local levels; meaning, a Federal sales tax would be added on top of current state and local sales taxes.

Federal sales tax revenue would theoretically finance all the needs of the government, including Social Security, Medicare, defense, and all other Federal programs. Revenue levels would depend greatly on levels of consumer and business purchasing instead of income.

On the positive side, the proposal would massively simplify the tax system by eliminating the need to file and pay income taxes. The IRS could be significantly reduced in its size and scope of work, as opposed to increasing staffing and tax compliance activities under current plans.

On the downside, the tax would generally be applied to every purchase, significantly increasing the cost of, basically, everything. The so-called “progressivity” of the tax system would no longer exist with the elimination of an income-based taxing scheme, where higher income Americans pay more to support Federal needs than middle- and lower-income Americans.

It is not clear the proposal has enough support to pass the House, and the legislation may, therefore, never even be considered.

(posted: 1-25-23)

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IRS Funding Rescission Proposal

The House passed (January 9) legislation (H.R.23) rescinding funds provided within the 2022 Inflation Reduction Act (IRA) for the Internal Revenue Service (IRS). The vote was 220-210, with 3 representatives not voting. All voting Republicans voted for the legislation, and all voting Democrats voted against the bill.

The IRA provided the IRS with $79.6 billion in additional funding primarily to increase tax enforcement ($45.6 billion), replenish operations and oversight ($26.0 billion), modernize business systems ($4.8 billion), and improve taxpayer services ($3.2 billion).

The House-passed legislation proposes to rescind about $71.5 billion worth of unspent funding. The Congressional Budget Office has, however, estimated that this action would actually cost the Federal budget an estimated $114 billion because the IRS would not be able to step up enforcement of existing tax laws. Last year, CBO estimated that revenue would increase from stepped-up enforcement by more than $180 billion, though such estimates are highly speculative.

House Republican leaders have argued that stepped-up IRS enforcement will hurt average American families. Putting aside the fact that no-one should be permitted to disregard/violate tax laws irrespective of income, and as it is unclear if the House majority believes tax laws should not be properly enforced, CBO nevertheless stated in August 2022 that while “some of the increased revenues will be collected from taxpayers with income less than $400,000; the amount will be a small fraction of the total increase.”

The US Senate is unlikely to consider the proposal in the current Congress.

(posted: 1-10-22)

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IRS Presidential Audit Process

The House Committee on Ways and Means released the results (December 20) of an investigation into the Presidential audit process of the Internal Revenue Service. The Committee looked at the extent to which an audit was conducted by the IRS on any of the recent prior tax returns of former President Donald Trump.

In summary, the report found that a mandatory IRS program to audit Presidential tax returns “was dormant, at best,” with just one audit opened while President Trump was in office and none were actually completed. The only audit that actually did start was only started immediately after the Committee inquired about the audit process and status with respect to the former President.

As part of the release, the Committee released its report and redacted detail of the President’s tax information.

(posted: 12-11-22)

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Individual Income Tax Ballot Measures - 2022

The 2022 midterm elections included three significant state ballot measures tied to the taxation of wealthier Americans.

Massachusetts - Ballot Question 1 proposed a constitutional amendment to modify the state’s constitution to add a 4% surtax to the current 5 percent individual income tax rate for annual income above $1 million. The additional revenue, about $1.2 billion initially,  would be used for education and transportation purposes.

The measure passed with more than 52% of the vote.

California - Proposition 30 proposed a 1.75 percentage point additional tax on annual income above $2 million. The additional revenue, projected to be between $3 to $4.5 billion, would be earmarked for zero-emission vehicle infrastructure and purchasing incentives.

The ballot measure failed with 58% of votes against passage. The state’s Governor opposed the measure claiming that because the rideshare company Lyft was supporting and advancing the measure and would have benefited from taxes being used to convert its vehicles, then the measure constituted inappropriate corporate welfare.

Colorado - Proposition FF proposed to tighten permissible itemized deductions for state taxes, with those limitations on both persons/married couples making more than $300K per year. The additional revenue for the state, estimated at about $100 million per year, would be used to fund a universal school meals program in the state (i.e., providing school breakfasts and lunches to all students).

The measure passed with nearly 57% of the vote.

(posted: 11-22-22)

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Inflation Reduction Act & Wealthier Taxpayers

The Inflation Reduction Act (IRA) (enacted in August 2022) had been considered to be a vehicle for the enactment of tax changes on wealthier Americans, but nothing significant was included.

The Biden Administration made a number of proposals in 2021 that it hoped would eventually be enacted, such as a 20% “Billionaires Minimum Tax” and an increase in the top marginal Federal tax rate to 39.6%, up from 37%. Ultimately, however, these types of tax changes could garner neither support from any Republicans, nor the support of key Democratic members of the Senate needed to ensure passage of the legislation.

One smaller provision, to address the carried interest loophole, was dropped from the IRA at the last minute after the objection of just one Senator – Kyrsten Sinema (D-AZ). That provision would have closed an arcane loophole in tax law that allows hedge fund managers, law firm partners and private equity executives, among others, to pay significantly less taxes on a certain type of income than ordinary workers.

The IRA did include an extension of the limitation on excess business losses of noncorporate taxpayers through 2028 (the provision was to expire in 2026). The limitation prevents individuals from using more than $250,000 ($500,000 for married taxpayers filing jointly) of business losses to offset nonbusiness income.

Likely the most impactful element of the IRA of concern to wealthier taxpayers is a funding enhancement for the IRS that is likely to lead to improved tax enforcement against tax cheats.The IRA provides about $80 billion in new funding for the IRS, including $46 billion for enforcement, alone. The Congressional Budget Office estimated that IRS funding could increase Federal revenue by over $200 billion over ten years. The Treasury Secretary Janet Yellen instructed the IRS (August 10) not to use increased audits associated with the new funding on small businesses or taxpayers with household incomes under $400K.

(updated: 9-20-22)

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