Tax Breaks are Expiring, Are You Keeping Track?

The IRS might be some taxpayers presumed nemesis, but they do have an ally within the agency:  the Taxpayer Advocate Service. The TAS is an independent agency, and every taxpayer is entitled to use its service whenever a tax problem has gone unresolved, an injustice occurred or an economic hardship exists that prevents him or her from fully paying a tax liability.

Personally, these folks are my heroes--they will go to the wall to protect the rights of taxpayers. They review general procedures and other issues to determine changes that should be made to better protect taxpayers.

Twice a year the Taxpayer Advocate submits a report to the House Committee on Ways and Means and the Senate Committee on Finance. No one from the IRS, the IRS Oversight Committee or the  Treasury  Department is allowed to review or edit the report.

A big concern of the TAS is that taxpayers may not be aware of the expired and possibly-expiring tax provisions that will alter their filings next year. I’m not talking about just the Bush tax cuts – although it’s on the list. There’s been plenty of press about that, but other taxes have expired with little to no fanfare.

Here’s a list of provisions to keep an eye on for renewal:

1. Alternative minimum tax – the AMT patch.  This expired at the end of 2011 and if it’s not renewed, 27 million more Americans will be subject to this tax this year.
2. Deduction for state and local sales taxes. If you live in a state that requires payment of state income taxes, the expiration will likely not affect you as your state income tax figure is usually higher than the sales tax deduction you are allowed. You get one or the other, not both. But if you had relied on this particular tax deduction, it expired at the end of 2011 and may not be renewed, so look before you file.
3. The deduction for mortgage insurance premiums (PMI), which was created in 2006, expired at the end of last year.  About 4 million taxpayers claim the deduction, but it might be a thing of the past.
4. The deduction for charitable contributions made directly from IRA accounts expired at the end of 2011. This was a nice write-off for taxpayers over the age of 70 ½ who receive distributions from their IRAs and don’t have enough to itemize deductions. The distribution taken for the year is decreased by the amount paid out directly to qualified nonprofit organizations in the form of charitable contributions resulting in lower taxable income.

A big issue in the report is the complaint that Taxpayer Assistance Orders (TAOs) and Taxpayer Advocate Directives (TADs) are being ignored. This is about elevating issues to the highest level of IRS leadership regarding systems and procedures that “impinge on taxpayer’s rights or impose excessive taxpayer burden” according to the report.

For example, in June 2011, the TAS proposed a directive designed to assist victims of preparer fraud. They requested that procedures be implemented to adjust the accounts of taxpayers that had been victimized by fraudulent return preparers. The official did not comply. In January 2012 the TAS issued a final directive, and again there was no response.

The report reads, “It is utterly mystifying to me why the IRS would seek to squelch the authority of the National Taxpayer Advocate to raise taxpayer rights and taxpayer burden issues to the senior IRS leadership in this way, and we certainly will not accede to attempts to constrain our advocacy efforts on behalf of our nation’s taxpayers.”

Here’s one concern cited in the report which mirrors a situation from my own personal experience: “The IRS’s increasing use of automated examination and other tax adjustment procedures which limit opportunities for taxpayers to interact directly with an IRS employee and often do not provide the taxpayer rights protections traditionally associated with audits.”

I recently represented a taxpayer in an automated examination that took place in Memphis. The document request and letter came from a “Tax Examiner.”  The phone number provided went to a call center in New York. I was never given the name or phone number of the auditor handling the examination. When I called the phone number listed on the document request, I was not allowed to connect with the person handling the case. My messages went unanswered until finally, after registering a complaint, I received a return phone call. When I was at lunch. No call back number was available although my assistant pressed for one. I never did speak to the auditor. I had a fax number, so I documented every move and faxed the auditor innumerable times.

The audit finally settled, but I was disconcerted and felt that I’d been given the short end of the stick because I had not been able to discuss certain important issues with the auditor directly. In my 30 years in business, this is a first. And it does not sit well with me.

The Taxpayer Advocate Service is also concerned about the IRS’s crackdown on persons with offshore accounts. Many of these folks are not engaged in tax evasion but the financial penalties for making honest mistakes are severe.

If you wish to speak to a taxpayer advocate about unresolved tax issues, you may contact them 1.877-777-4778 or go to www.taypayeradvocate.irs.gov

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.