Treasury Department says fewer refunds better for U.S. taxpayers

By Laura Davison

Bloomberg News
February 14, 2019

The U.S. Treasury Department is defending the declining numbers of tax refunds being issued so far this year, saying that taxpayers already saw the benefits of the new tax law in their paychecks.

The number of tax refunds issued so far fell nearly 16 percent to 11.4 million, compared with 13.5 million at the same point in the tax filing season last year, according to Treasury data published on Thursday. The average amount of those refunds dropped to $1,949, compared with $2,135 in 2018.

“Most people are seeing the benefits of the tax cut in larger paychecks throughout the year, instead of tax refunds that are the result of people overpaying the government,” the Treasury said in a statement. “Smaller refunds mean that people are withholding appropriately based on their tax liability, which is positive news for taxpayers.”

The data, which reflects the first two weeks of the filing season, has been a sore point for some taxpayers who discovered that their refund is smaller than last year as a result of the late-2017 tax overhaul, which altered available deductions and credits and revised withholding tables.

In some cases, taxpayers who were counting on a refund found they owed the government instead.

The IRS has been off to a slow start this filing season after a 35-day government shutdown left the agency with a fraction of its staff just before the filing season launched Jan. 28.

Taxpayers, too, have been slower to file this year. The IRS has received about 7 percent fewer returns at this point in the filing season compared with a year ago.

The IRS is urging taxpayers who unexpectedly owe money to pay what they can if they can’t cover the whole liability at once. The agency has payment plan options for people in that situation. The IRS has also waived some penalties for those who didn’t have enough withheld out of their paycheck during the year.

Fear of filing? Some taxpayers finding tax bills, not refunds

Published February 11, 2019

 

Adam Oleson has enjoyed a tax refund every year for the past couple of decades. He normally counts on it to make an extra house payment, reduce student-loan debts or pay down the credit cards.

But this year, no such luck. Not only won’t Oleson get a refund, he said he owes the Internal Revenue Service $1,500.

A 40-year-old electrician, Oleson lives in Omaha, Nebraska, with his wife and three children. His is the kind of middle-class family that supporters of the 2017 tax overhaul said they were trying to help. But Oleson said the loss of deductions for union dues, tool purchases and continuing education costs have actually made him worse off.

He is one of an estimated 5 million taxpayers who used to rely on a refund every spring. But because of lower rates, the loss of some deductions and the addition of new tax breaks in the overhaul, those taxpayers are not seeing the refunds they’re used to.

But that doesn’t necessarily mean they didn’t benefit from the law. Some tax experts say the benefits are just coming in a different form, such as lower withholding, which translates into a bigger paycheck instead of one refund in the spring.

‘Wrong Metric”

“Most people don’t know how much they pay in taxes,” said Bob Kerr, who leads the National Association of Enrolled Agents, a trade group for tax preparers. “But the refund is the wrong metric to measure it.”

Right or wrong, the drop in expected refunds is creating fear and anger in accountants’ waiting rooms.

“Every single person” who walks in is dreading how much they’re going to owe the IRS, said CPA Gail Rosen, who heads the Martinsville, New Jersey, office of WilkinGuttenplan. “They come in and they worry.”

But telling people they paid fewer taxes throughout the year doesn’t help the sticker shock felt by filers who’ve become accustomed to getting a check, not writing one.

Only about 5 percent of taxpayers — about 7.8 million people — are expected to pay more under the new law. But about 5 million, according to the Government Accountability Office, will find their typical tax refund replaced by a tax liability.

“A lot of people are going to be surprised,” Rosen said.

Refunds Decline

The IRS estimates it will ultimately issue about 2.3 percent fewer tax refunds this year. In the first week of the filing season, the number issued fell about 24 percent, though much of that is likely tied to the government shutdown that left the IRS understaffed as it was preparing for filing season.

So far, the average refund is less than at the same point in 2018, averaging $1,865 compared with $2,035 last year, according to IRS statistics from the first week of the filing season. The Treasury Department downplayed its own data in a tweet Monday, saying the dip is based on a “small initial sample from only a few days.” A few minutes later, Treasury also tweeted a link to the IRS’s withholding calculator, encouraging taxpayers to look up how much they should be having taken out of their paychecks.

The confusion partly stems from the IRS changing the guidelines that helped employers determine how much to withhold from workers’ paychecks. The new withholding formulas put in place last year were more generous, but are a blunt instrument that doesn’t reflect the new law’s other changes, like the SALT cap as well as an end to the deduction of unreimbursed employee expenses such as home offices and union dues.

For the affluent taxpayers currently preoccupied with SALT limits, the new tax law also frees them from the alternative minimum tax, or AMT, and creates a much more generous credit for children under 17.

Big Surprise

Put it all together and the amount withheld from a paycheck in 2018 could be very different from what a taxpayer will owe the IRS by April 15.

The only way to have prevented a big surprise was to adjust withholding last year. Few people actually did that and it’s difficult without professional advice, because so many factors are at play.

“It’s a moving target,” said Arnold Berman, a CPA at ABD Associates in Valhalla, New York. “Your situation is going to be different from someone else with your income.”

The IRS is still encouraging people to check their withholding to make sure their refund expectations align with reality. Tax professionals also say withholding should be adjusted at major life events: marriage, the birth of a child, a significant raise or when changing how much of a salary is allocated to a retirement account.

Child Credit

Middle-class families with simple situations seem most likely to get pleasant news, thanks to the new $2,000 child tax credit. For more affluent taxpayers, their refund will depend on the complex interplay of lower rates, the easing of the AMT and new deduction limits.

The SALT cap has gotten the most attention from taxpayers in states like New York and California with high income and property taxes, but their angst will be offset by changes to the AMT, which prevented many of them from deducting their full state and local tax burden anyway.

The IRS is trying to soften the blow of all the refund confusion. This year, the IRS will waive the penalties for those who paid at least 85 percent of their tax liability, down from the usual 90 percent.

Taxpayers fearful of how much they owe are better off to file and not pay immediately than not to submit a return at all.

“The failure-to-file penalties are the worst,” said Harvey Bezozi, a CPA in Boca Raton, Florida.

Middle-Class Woes

The confusion is likely to do little to sway public opinion in favor of the new law. Republicans acknowledged in an internal poll before the 2018 midterms that they’d lost the messaging battle on tax cuts. The law has consistently struggled to poll above 50 percent approval.

Representative Peter King, a New York Republican who broke from his party and voted against the 2017 tax law, said he has already heard from constituents complaining that they’re paying more this year.

Getting to know the IRS payment plans

By Jim Buttonow

For the 2019 filing season, the IRS projects that more taxpayers than ever will file and owe. Many will be able to pay – but a lot of them will need to make other arrangements because they can’t pay their full tax bills to the IRS.

When taxpayers can’t pay their tax bills, they have a number of options, including payment plans, to pay off their outstanding taxes and accrued penalties and interest. Of the 16 million taxpayers who owe back taxes, 97 percent of them qualify to use a payment plan that’s fairly easy to set up and would likely give them the best payment terms.

The IRS has three simplified payment plans:

  • Guaranteed Installment Agreements (GIA): 36-month payment terms for balances of $10,000 or less.
  • Streamlined Installment Agreements (SLIA): 72-month payment terms for balances of $50,000 or less.
  • Streamlined Processing for Balances Between $50,000-$100,000: 84-month payment terms for balances between $50,000 and $100,000.

Advantages of 36-, 72-, and 84-month agreements

These are the three most common IRS payment plans. They’re all easy to obtain from the IRS, because they:

  • Require minimal, if any, financial disclosure to the IRS;
  • Don’t require an IRS manager to approve the payment terms;
  • Don’t require taxpayers to liquidate assets to pay the IRS; and,
  • Can be set up in one phone call or interaction with the IRS.

The GIA (36 months) and SLIA (72 months) can be completed online using the Online Payment Agreement tool at IRS.gov. The GIA and SLIA are also attractive to taxpayers who don’t want a public record of their tax debt, because these agreements don’t require the IRS to file a public notice of federal tax lien. Taxpayers who owe between $25,000 and $50,000 must agree to pay by automated direct debit or payroll deductions to avoid a tax lien.

The “Streamlined Processing” 84-month payment plan works a little differently. The IRS started the 84-month plan as a pilot program in 2016 to make it easier for taxpayers who owe between $50,000 and $100,000 to get into a payment plan with the IRS. Taxpayers can avoid filing their financial information with the IRS if they agree to pay their tax bill by direct debit or payroll deductions. If they don’t agree to these automated payments, the IRS requires taxpayers to provide a Collection Information Statement (IRS Form 433-A or 433-F). Even with streamlined processing, the 84-month plan has one catch: The IRS will file a federal tax lien.

The pilot program for the 84-month plan is still in effect today. The IRS hasn’t completed its study on whether the 84-month plan is an effective collection option. One thing is clear about the program: It likely provides better payment terms and relieves burden for taxpayers.

The rules

GIAs are for taxpayers who owe the IRS $10,000 or less. As the name suggests, the payment plan is “guaranteed” if the taxpayer meets all conditions of the GIA:

  • It’s for individual income taxes only;
  • Total balances owed, including penalties and interest, must be $10,000 or less
  • The taxpayer must pay within 36 months;
  • All required tax returns have been filed; and,
  • The taxpayer has not entered into an installment agreement in the previous five years.

SLIAs can be used by individual taxpayers who meet these conditions:

  • It’s for income taxes and other assessments, including unpaid trust fund penalty assessments;
  • The total assessed balance is $50,000 or less (not including accruals of penalties and interest after the original assessment of tax, penalties, and interest);
  • The taxpayer must pay within 72 months; and,
  • All required tax returns have been filed.

Taxpayers can set a GIA or SLIA by:

  • Using the online payment agreement tool at IRS.gov;
  • Filing Form 9465 with the IRS; or,
  • Contacting the IRS by phone

Terms may be shorter for old tax debt

Taxpayers should be aware that they may not get the full length of time to pay their outstanding tax balances if their debt is old. For each of these simple payment plan options, the IRS will limit the terms if the collection statute of limitations (generally 10 years from the date that tax is assessed) is shorter than the prescribed payment terms.

For example, if a taxpayer’s collection statute expires in 24 months, any GIA, SLIA, or 84-month plan will be limited to 24 months. Taxpayers who can’t afford these payments may have to consider a payment plan based on their ability to pay.

Ability-to-pay installment agreements require taxpayers to file a Collection Information Statement and prove their average monthly income and necessary living expenses. In addition, the IRS often asks taxpayers to liquidate or borrow against their assets to pay their outstanding tax bill in ability-to-pay agreements.

Fees apply

There is a setup fee for all IRS installment agreements. The fees range from $225 for installment agreements set up by phone and paid by check, to $31 for agreements set up online and paid by automatic direct debit. Taxpayers who meet low-income thresholds can get the fee waived.

Tips for all three agreements

The GIA, SLIA, and 84-month payment plans are usually the best way to set up a payment plan with the IRS. They’re usually quick and easy to set up and likely provide taxpayers with better payment terms than most other options.

Taxpayers who can’t pay according to the GIA and SLIA terms face tax liens if they owe more than $10,000. Taxpayers also need to request the GIA or SLIA before the IRS files a tax lien. After the lien is filed, taxpayers must pay their full balance to get the lien released, or pay down the balance to $25,000 to start lien-withdrawal proceedings.

Here are a few other tips related to these simple agreements:
1. Avoid a tax lien – pay down the balance to get into a SLIA. Here’s the best plan for taxpayers who owe more than $50,000: Get an extension to pay of up to 120 days, get funds to pay the balance down to under $50,000, and obtain a SLIA. Doing so will avoid the filing of a tax lien.
2. For SLIA, it’s the “assessed” balance – not the total amount owed. The $50,000 SLIA threshold is based on the taxpayer’s assessed balance – not the total amount they owe. The assessed balance includes tax, assessed penalties and interest, and all other assessments for each tax year. It doesn’t include accrued penalties and interest after the original assessment. For example, if a taxpayer’s original assessment is under $50,000 for an older tax year, he may accrue additional penalties and interest that puts the total balance over $50,000. In this situation, they would still qualify for a SLIA based on the original assessed balance. Taxpayers can also designate payments to reduce their “assessed balance only” to help them qualify for a SLIA.
3. Apply and pay automatically to reduce fees. The IRS increases installment agreement setup fees if taxpayers pay by check. Reduce the setup fee by agreeing to automatic direct debit payments. Automatic payments also avoid a monthly reminder letter from the IRS about the payment due.
4. Pay by direct debit or payroll deduction to avoid default. IRS installment agreements have a high default rate. To avoid a default, taxpayers must make their monthly payments. The best way to avoid missing a payment is to have the payment automatically deducted from the taxpayer’s financial accounts.
5. Don’t owe again. The second most common cause of defaulted installment agreements is filing future tax returns with unpaid balances. Taxpayers need to change their withholding and/or make estimated tax payments to avoid owing taxes that they can’t pay in the future.
6. Taxpayers can miss one payment a year. Most IRS payment plans allow taxpayers to miss one payment per year and not default. It’s best for the taxpayer to notify the IRS in advance if they can’t make a payment.
7. If the taxpayer’s financial situation worsens, get an ability-to-pay plan. Taxpayers can always renegotiate their payment plans if their financial circumstances change. For example, if a taxpayer loses their job, they may not be able to pay the IRS. In these cases, the taxpayer can contact the IRS and provide documentation on their ability to pay. This may mean a lower payment or even payment deferral (called currently not collectible status). Be careful here: If the taxpayer owes more than $10,000 and can’t pay within 72 months, the IRS is likely to file a tax lien.
8. Remember to ask for penalty abatement at the end of the plan. One important action to take at the end of a payment plan is to request abatement of the failure to pay penalty. Taxpayers should consider using first-time abatement or reasonable cause abatement if they qualify.

Each year, more than 3 million taxpayers get into a payment plan with the IRS. With tax reform, we can expect that more taxpayers will need a payment plan in 2019. Taxpayers who owe less than $100,000 should first look at 36-, 72-, or 84-month payment plans with the IRS. Many will also benefit from the help of a qualified tax professional to find the best option.

The eternal question: What are a taxpayer’s chances of an IRS audit?

By Jim Buttonow

 

As IRS budgets and audit staff continue to diminish, audit numbers are at an all-time low. But when you file your clients’ returns, the most common question persists: “How likely am I to be audited?”

Taxpayers whose returns stray far away from the norm or have “large, unusual or questionable items” can always be singled out for audit. But overall, as the statistics bear out, the IRS likes to audit taxpayers with certain characteristics.

To start, individuals get more audits than business and specialty taxpayers. In 2017, the IRS reported a 1 in 184 (0.542 percent) chance of being audited for all taxpayers. For taxpayers filing individual returns, the likelihood of audit is 1 in 161 (0.623 percent). Corporations (1120, 1120-S) and partnerships are audited less than individuals – with an audit rate of 1 in 224 (0.445 percent). In 2017, the IRS audited only 1 in every 568 (0.176 percent) employment tax returns (Forms 940/941).

Individual return audit rates

Out of the 150 million taxpayers who filed in 2017, here are the IRS statistics on who experienced an audit:

Form 1040 taxpayer types, in descending likelihood of audit Returns audited
International taxpayers 1 in 19
Taxpayers with gross income before deductions of over $1 million 1 in 23
Sole proprietors with gross income before deductions between $100,000 and $200,000 1 in 48
Sole proprietors with gross income before deductions between $200,000 and $1 million 1 in 64
Taxpayers with self-employment income under $25,000 who claim the EITC 1 in 72
OVERALL INDIVIDUAL AUDIT RATE 1 in 161
Farmers 1 in 228
Wage earners who make under $200,000 and don’t claim the EITC (65% of taxpayers fit this category) 1 in 364

The IRS is focusing its audit resources on areas where it knows taxpayers are traditionally non compliant: small businesses, international taxpayers, high-wealth taxpayers, and possible Earned Income Tax Credit fraud schemes. Traditional wage earners who have traceable income reported on Forms W-2 face much less scrutiny.

Business and specialty tax return audit rates

Out of the millions of returns filed by businesses, employers, and specialty taxpayers (estate, gift, trust returns), here are the IRS statistics on who experienced an IRS audit:

Business/specialty taxpayer types, in descending likelihood of audit Returns audited
Large corporations (Form 1120, assets greater than $5 billion) 1 in 3
Estate tax returns 1 in 12
Large corporations (Form 1120, assets between $10 million and $5 billion) 1 in 23
Excise tax returns 1 in 72
Gift tax returns 1 in 130
Small corporations (Forms 1120, not 1120-S) 1 in 146
OVERALL CORP/PARTNERSHIP AUDIT RATE 1 in 224
Partnership returns (Form 1065) 1 in 260
Estate and trust income tax returns (Forms 1041) 1 in 971
Employment tax returns (Forms 940 and 941) 1 in 568
S corporation returns (Forms 1120-S) 1 in 358

The IRS questions more returns through automated matching notices

Audits are not the only way the IRS can question the accuracy of a tax return. Over the past 20 years, the IRS has ramped up more automated return checks in the form of matching programs. For example, in the IRS CP2000 program – the automated under reporter program – the IRS matches income between tax returns and IRS information to look for discrepancies. If there’s a mismatch, the IRS automatically sends out a notice asking for explanation. This program has increased 143 percent since 2000 – and it outnumbered audits 3.1 to 1 in 2017.

Clearly, smaller IRS budgets and personnel over the past seven years have even lowered the number of CP2000 matching notices. But automated notices have become the norm. And although CP2000 notices are not technically IRS audits, they allow the IRS to increase its ability to challenge returns far beyond what it can do through people-intensive audits. Matching notices also feel a lot like an audit for taxpayers. If you add the CP2000 matching program to the IRS “return challenge” rate for individuals, the chances of the IRS challenging an individual taxpayer’s return come out to 1 in 35 instead of 1 in 161.

The cost of an audit can be high

Audits are likely to be costly. IRS data shows that over 90 percent of individual audits result in a tax change. The average additional tax owed is $6,014 for a mail audit and $21,918 for a more intrusive IRS field audit.

CP2000s can also be costly. The IRS collected $6.7 billion in additional tax on the 3,295,000 matching notices it sent in 2017 – an average of $2,033 per notice issued.

On top of the additional tax for audits and under-reporter notices, there are accuracy penalties, which can add 20 percent to the tax bill. Since 2005, the IRS has increased accuracy penalty assessments by 854 percent — with more than 557,000 taxpayers getting an additional 20 percent penalty on their audit or CP2000 notice.

Do a proactive income review

For some taxpayers, like international taxpayers and higher-wealth taxpayers, avoiding an IRS audit can be more difficult because the IRS believes that their returns are more likely to have errors and omissions.

For most taxpayers, avoiding IRS scrutiny means reporting all wage and income documents (Forms W-2, 1099, etc.) to the IRS. Tax pros can’t get IRS information statements from the IRS before the end of filing season, so they need to rely on their client’s ability to provide them all the information.

Tax pros can do their best tax season due diligence by looking at last year’s return and IRS wage and income transcripts for sources of income. They can also do a post-filing review by obtaining their client’s current-year wage and income transcripts that are available during the summer, before the IRS issues the first CP2000 notices later in November. This post-filing review is still proactive before the IRS issues any notices. If tax pros find unreported income, they can file an amended return to avoid any potential accuracy penalty that could be associated with a notice or audit.

Clients who don’t avoid an audit or CP2000 notice will look to you for help. This is when tax professionals show their ultimate value to clients – by helping clients navigate and get the best results.

Congress re-introduces bill to simplify small business taxes

By Michael Cohn

The Democratic and Republican leaders of the House Small Business Committee have re-introduced a 2017 bill to help small business owners simplify their taxes.

Despite the passage of the Tax Cuts and Jobs Act at the end of 2017, the bill includes a number of provisions that were left out of the far-reaching tax code overhaul. Rep. Steve Chabot, R-Ohio, the ranking Republican on the committee, partnered with Rep. Nydia Velázquez, D-N.Y., who now chairs the committee. Chabot originally introduced the bill in 2017 when he chaired the committee, before control of the House switched to Democrats.

The bill aims to reflect technological advances and modern business models by allowing electronic signatures, strengthening anti-fraud measures, and clarifying cafeteria plan participation for small businesses.

“The Small Business Owners’ Tax Simplification Act of 2019 seeks to further modernize the tax code in a way that offers our nation’s entrepreneurs both clarity and consistency, so they are able to more effectively start and grow their businesses,” Chabot said in a statement last week.

Like the 2017 legislation, the 2019 bill would amend the tax code to align the deadlines for quarterly estimated tax payments with the calendar year quarters for small businesses and self-employed individuals. The bill would also modify the dollar thresholds for various information reporting requirements.

In addition, the bill would allow certain self-employed individuals to participate in cafeteria benefit plans. It would exclude from self-employment income net earnings that are less than the amount required under the Social Security Act for a quarter of coverage for the calendar year in which the tax year began. The legislation would also allow certain health insurance costs of self-employed individuals to be deducted for self-employment tax purposes. The bill would also specify that voluntary tax withholding agreements, training or group discount programs have no effect on whether an individual is classified as an employee or an employer.

Under the bill, the Treasury Department would be mandated to establish uniform standards and procedures for the acceptance of digital or electronic signatures, and use pre-notification testing to verify recipient information before transferring a tax refund or credit through an electronic funds transfer.

The legislation is also aimed at businesses involved in the so-called “sharing economy.” “I am pleased to work across the aisle by joining Ranking Member Chabot in re-introducing this tax bill that takes common-sense steps to benefit the backbone of the American economy—small businesses,” stated Velázquez. “By allowing companies the flexibility to assist independent contractors, this bill provides more tax compliance assistance for micro-entrepreneurs as the sharing economy continues to expand. When it comes to taxes, we simply cannot afford to leave our small businesses and entrepreneurs behind.”

A trade group representing entrepreneurs, the National Association for the Self-Employed, welcomed the legislation.

“We applaud both U.S. Reps. Velázquez and Chabot for their bipartisan commitment and support for America’s small business community,” said NASE president and CEO Keith Hall in a statement. “Millions of small businesses, including the self-employed and micro-business community, lose valuable time and money by trying to navigate the maze of burdensome business regulations each year. This is time and money that could be directly invested back into their business operations, allowing them to grow and expand their businesses.

He sees the need for the legislation even after passage of the Tax Cuts and Jobs Act. “Our elected officials in Washington took extraordinary steps in 2017 to simplify the tax code and make it easier for small businesses to complete their tax returns,” Hall stated. “These businesses will realize these fruits this year while filing their tax returns. The bottom line: our tax code is outdated and cumbersome. But this new small business legislation, combined with the new tax system, are critical steps to modernizing our tax code so it is beneficial for all businesses.”

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.

CPA, Taxes, Bookkeeping, Payroll, Accounting Services

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