October 1, 2013 Client Newsletter

First a little positive waves from three of my favorite small business gurus..  

   

"Motion beats meditation." --Gary Halbert

                       

“Sometimes good enough is good enough.” --Dan Kennedy

“What if someone said to you that you should set up your business as if it were meant to be a prototype for 5000 more just like it? Not almost like it, but just like it. Perfect replicas, Clones. In other words, pretend you are setting up a business which you intend to franchise. It doesn't matter if you ever really mean to franchise your business or not. The point is that you should set up your business as if you were going to do so. Why? Because the advantages are so enormous and the risk of failure is so vastly reduced that it would be foolish not to embrace a winning formula. Let's call this winning formula, The Franchise Prototype.”--Michael Gerber

In August I attended the IRS Nationwide Tax Forum.  Many of the tax preparers in attendance were wearing a t-shirt with the message “I survived 2013”.  Why?  I don’t have to tell you that 2013 proved to be one of the most challenging tax seasons ever.  Delayed form availability.  Delayed processing of returns. The IRS did not start accepting tax returns that had depreciation until March.  Loss refunds.  Inquiries about earned income credit causing heartache for clients really needing their refunds.  I guess it was their not so subtle way way to send a message to the IRS powers to be, that despite it all we tax preparers made it.  I don’t think the message got through.  But I sure got a lot more gray hairs as a result.   

The Deputy Commissioner for operations of the ten IRS campus Wage and Division offices, David Alito, spoke about what is really going on, the meat and potato issues of the real grunt work we have to deal with every day.  Frankly he was candid and forthcoming.  From my notes of his presentation:

1. Correspondence audits are going up and up.  IRS will be focusing more on sending you a letter requiring documentation of expenses claimed on your return.  They will open Schedule C, Profit or Loss forms to the growing list of returns qualifying for correspondence audits. Small businesses continue to be the target of examinations.  And the number of examinations are going to increase since the IRS has now targeted Schedule C filers.  Traditionally IRS has required an office visit, sitting down belly to belly with an examiner, for a Schedule C filer.  With this new approach, the goal is to attack in their minds the largest tax gap….IRS’ way of saying the taxpayers that do not report their correct taxable income...in a more efficient manner and allow more audits with less personnel.
2. The sequester and budget cuts have hurt the IRS from processing virtually any inquiry in any definition of some efficient manner.  The IRS is working at full capacity. Expect at least 90 day delays in responding to your inquiry.  It cannot handle the current workload.  Mr. Alito passed on tips on how to get correspondence handled in a more efficient manner including how to avoid the dreaded I don’t know where it goes pile.
3. The IRS processes 2.5 billion documents and a 140 million tax returns a year.  Under the Affordable Care Act the IRS, is required to process an additional 125 tax forms mandated by the legislation, 42 provisions that will add or amend tax law, and eight provisions will require the IRS to build new processes that do not currently exist within the current system of tax administration.  Oh by the way the, the indoor tanning excise tax, one of the first taxes mandated by the law, the tax receipts are much less than anticipated.  Especially considering that businesses covered by the law are not collecting and/or filing tax returns.  Indoor tanning excise tax receipts are not even close to what was predicted. The IRS has done by its own admission a poor job in communicating to taxpayers information about the Affordable Tax Act.  It has no way of determining which businesses should be filing tax returns.  Apparently there are many tanning beds out there in places you wouldn’t figure would have a tanning bed.  Expect yet another crackdown.  This time looking for tanning bed operator scofflaws.     
4. Because the IRS cannot keep up with the current demands of the system, especially correspondence examinations, audit reconsideration is now pretty much a rubber stamp, when it the past it sometimes we felt it is easier for a camel to go through the eye of a needle than to get the IRS to reconsider a correspondence examination. So there it is. The IRS is bending to pressure to close the tax gap, so it is going to increase the number of correspondence audits, yet it doesn’t have the resources to handle the current workload.  We call that normal. Can we say SNAFU.
5. IRS is currently testing something they call virtual audits in Florida.  You no longer have to visit the IRS.  Everything is handled 21st century style via teleconferencing.  Although it is still in the testing phase, the prediction is that this virtual audit will soon become the norm.  Examiners will be spending less time in the field and more time in the office becoming more efficient by handling more cases than before.

In summary, I always seem to enjoy getting out of the office and listening to the current focus at the IRS Nationwide Tax Forums. Kibitzing with fellow tax geeks.  You can’t help but get a little pessimistic about things. The impression I got from both fellow preparers and IRS staffers is the upcoming Affordable Care Act has put an increased burden on a government agency that touches virtually every American, that has had their budget repeatedly cut, and frankly lacks the resources and personnel to administer the law.  Tax collections from enforcement actions are down by $9 billion for a second year in a row.  And the future is rather gray.  

It is up and going.  Rough and amateurish.  Learning more each day.  A few test podcasts from your tax guy are now online.  We have linked to them from our blog.