How to Improve the IRS

Tax season is over.  Hopefully, you got your 2020 tax return filed by May 17, or filed an extension (which was the topic of my last column).

Before proceeding, I need to point out that the Allied invasion of Europe (aka D-Day) occurred 77 years ago today.  Had those brave heroes not been willing to fight against Hitler’s tyranny and die for freedom, this world would be a vastly different place and this column might have been written in German.

Today, I would like to make a dozen recommendations about how to improve the Internal Revenue Service (IRS).  I have no authority to make these suggestions to the IRS Commissioner, the Secretary of the Treasury, or to Congress, but I have been preparing taxes and interfacing the IRS on behalf of my clients for more than 40 years.

The IRS should:

1. Stop being a bully!
2. Cease unethical, unscrupulous, and devious practices.
3. Restore common sense in audit and collection activities.
4. Not assume that they are always right.
5. Treat taxpayers with respect instead of Public Enemy #1.  If you ever received an IRS notice demanding payment of taxes and penalties, you know what I mean.  A harshly worded letter is not going to motivate criminals to pay tax they owe.  However, more than 95 percent of taxpayers are good citizens that are doing their best to stay in compliance with the IRS.  Most IRS notices are insulting and are often wrong.
6. Immediately cease taking positions that contradict the plain text of the Tax Code.  The IRS expects taxpayers to know and respect the Tax Code.  Certainly, the IRS should uphold the same standard.  If they feel certain tax breaks are too generous, then their proper course of action is to ask Congress to modify a certain section of the tax law, not pretend it isn’t the law. 
7. Pause, before taking drastic action against a taxpayer or tax preparer.  Reasonable care should be taken to make sure the taxpayer received the threatening notice that could turn their lives upside down.  Here are 2 incidents.  
   1. A tax lien notice was sent to a taxpayer.  They never received it.  The IRS filed a tax lien with the county recorder of deeds.  After obtaining professional help, they were able to prove the tax due was not $25,000 but was only $8,000.  They agreed and paid the $8,000 but after two years the IRS tax lien has not been removed.  Because of this ding on their credit, their bank denied a refinance request.
   2. Another IRS horror story involves a self-employed CPA.  The IRS deactivated their ability to E-File tax returns in the middle of the most recent tax season.  Again, a notice was mailed in late 2020 but never received.  After calling the IRS they found out that the IRS records were in shambles.  The IRS had no record of five (5) previous responses, but they did cash a check for a tax payment.  Without timely notice to the CPA, the IRS pulled the plug during tax season.  The CPA is actually in compliance and has proof that the tax and penalty were paid years ago.  But, since the IRS “is always right” and doesn’t listen, they can reapply for an EFIN in two years. 
   3. In summary, both catastrophes could have been avoided if the notices were sent via Certified Mail.
8. Make the Taxpayer Advocate Service (TAS) independent of the IRS.  The TAS is ultimately beholden to the IRS. 
9. Stop sending out computer generated notices hoping that taxpayers will pay the tax rather than question the validity of the assessment.  In my experience, the IRS notices are incorrect half the time.  At the least, have an IRS employee review the notice before it goes out. 
10. Audit more multimillionaires.  Since statistics seem to indicate that the IRS audits middle class taxpayers more than rich people, it seems that the IRS is reluctant to audit wealthier taxpayers because they are likelier to present a tough defense.  However, IRS victories would bring in exponentially more taxes.  
11. Treat taxpayers fairly during audits.  All too often, IRS audit adjustments are significant, but not worth fighting.  If the IRS says you owe $5,000 (that you truly don’t owe) are you going to pay $25,000 in legal fees to fight the onerous tax assessment in Tax Court, where you still might lose?  Or, are you going to pay the $5,000 with a grimace and move ahead with your life?  (Bully comes to mind.)
12. Reimburse audit defense expenses when they lose a case in court.  Hopefully, this would discourage indiscriminate audits.

Here are three additional ideas (freebies) for Congress regarding taxes.

1. Don’t use the IRS as a weapon.
2. The final tax law should be set before the year begins.  This should be obvious to lawmakers and federal judges.  On January 1, 2020, the tax laws and regulations for the year should set, period.  For tax year 2020, several laws affecting taxes were passed because of COVID-19.  The government is an amalgamation of other bureaucracies, such as the Treasury Department, of which the IRS is a part.  
3. Just because something needs to be done, doesn’t mean the IRS is the best solution to make it happen.

Perhaps you have an IRS horror story of your own.

Aric Schreiner, CPA, PFS, Certified Tax Strategist, helps successful professionals and small business owners strategize to reduce taxes and audit risk.