The IRS Budget: What it Means for Taxpayers

Want to know who the IRS will be keeping an extra-close eye on this year? The agency released its $12.8 billion proposed budget request for 2013, an increase of $944.5 million (8%) from 2012,and outlined how it will use the funding.

Most of the increase is to replace funding lost over the last two years. A recent study showed that the tax gap of $385 billion, which represents an 85% compliance rate, remains relatively unchanged since 2001, and the IRS can’t increase compliance without more financial help.

A little more than 90% of federal government receipts come from the Internal Revenue Service. In 2011, the IRS collected $2.415 trillion in tax revenues, which provides a pretty good leg to stand on when requesting a larger budget.

Here’s how the increased funding will be used:

Almost half of it, $404 million will be used for enforcement, so  taxpayers can expect more audits and collection activity. Once new hires are fully trained, the IRS plans to generate an additional $1.48 billion in revenue from enforcement activities—that’s a pretty good return on investment.

For the past several years, the agency has scrutinized offshore accounts and foreign transactions, and it plans to ramp up its inspections by hiring more technical specialists to examine taxpayers involved in international transactions. The offshore voluntary disclosure program will continue to allow taxpayers to come forward to declare taxable activities from foreign shores.

The IRS is also looking to combat identity theft that leads to fraudulent refunds. For the past several years, IRS Commissioner Doug Shulman has pushed technology upgrades that will tie in third-party documents to filed tax returns before refunds are issued. A couple of improvements have already been made: reporting of cost basis of stocks in conjunction with sales of stock by brokerage firms on Form 1099-B and reporting revenues via debit and credit card companies on the new IRS Form 1099-K. With new budget funds, the IRS will hone in on Earned Income Tax Credit fraud and non-compliant and fraudulent claims by prisoners.

The agency plans to use $35 million on enhancing compliance by tax return preparers. Every return preparer is now required to be registered and licensed by the federal government, but the agency will now focus more on competency testing and continuing education requirements.

At a recent tax seminar, an associate of mine ran into a tax preparer he hadn’t seen in several years. The gentleman told him he hadn’t been to a tax seminar in eight years, which is appalling, especially considering that tax law changes about every 20 minutes. Be sure your tax professional is licensed and paying attention to new tax law changes coming down the pike.

The remainder of the funding is to improve its IT programs: Online customer service on its website, electronic filing program, and the electronic payment program (EFTPS).  According to a press release from the IRS, “In 2012, the IRS delivered the most significant update to its core tax processing system in decades. Through the deployment of the first phase of CADE 2, the IRS transitioned to a daily processing cycle from a weekly batch cycle. Also for the first time, IRS processing systems began accepting all 1040 forms electronically through a modernized e-filing capability.”

The bulk of the budget increases revolve around audits, collections, and improvements to computer systems.

There is no help in the proposed budget to improve customer service. In fact, the IRS plans to reduce the dollars it will spend on pre-filing taxpayer assistance and education.  I’m afraid this means even longer hold times if you wish to call with a general question.  It might behoove you to forget the phone and use the IRS website at www.irs.gov to find your answers.

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.