Later this month I will visit Washington D.C. for a conference. I hope to go to some museums while I am there. There is much for a visitor to do in Washington.
My youngest daughter lived in D.C. for six months while visiting American University and working for a nonprofit organization. She loved it.
But there is a dark side to Washington. It is the location of our government. And it is really impossible to overstate the silliness that comes from our government.
On Jan. 10, the House passed House Resolution 23. This bill was passed on party lines. It eliminated $81 billion of the $89 billion appropriated for IRS improvements.
The House kept about 10% of the new IRS money. That was the portion allocated to improved taxpayer service and telephone support operations.
Out was 90% allocated for increased enforcement activities and agency support operations, such as improved technology.
The Congressional Budget Office estimates that H.R. 23 will add $114.3 billion to the deficit over the next 10 years.
This bill is dead on arrival. The House knows this. It is a political statement, not a serious legislative action.
What is that political statement? That the IRS is out of control and needs oversight by Congress.
It is extremely difficult to have any contact with the IRS these days — or the past few years. I am a bit confused how an increasingly absent IRS is “out of control.”
I am not at all confused about Congress being out of control. Yet the House is telling us that the Congress must exercise control over the IRS.
Raise your hand if you have had face-to-face contact with an IRS agent in the past five years. Come on folks, don’t be shy.
Almost 90% of IRS “audits” are correspondence audits. This means your only contact is a letter from the IRS. And the overall number of audits is way down due to resource constraints.
IRS publishes “statistics of income” (SOI) data. The latest is for the 2020 tax year. In 2020, 164.4 million individual income tax returns were filed.
Most people receive their income in ways that are reported by third parties to the IRS. This includes wages (130 million W-2 forms), interest and dividends (79 million 1099 forms), and capital gains (also 1099 reporting, including of tax basis for many transactions).
The same is true for IRA distributions, pensions and annuities, and Social Security payments. If these items cover your income, IRS could probably prepare your return from reported data.
Correspondence audits are most common because IRS can compare your reported income to the third-party reports. If they do not match, you’ll be asked to explain the difference.
Higher income people have diverse sources of income. This may include income from self-employment, rental properties, and from partnerships and S corporations.
These income sources are reported on IRS schedule C or E. About 12% of all filers report any income on Schedule E. Just under 20% report on Schedule C.
But these Schedule C and E items are significant. And they have no third-party reporting. Common sense says the risk of underreporting is greater than third-party reported income.
Hold on Hamill, some of you are saying. Partnership and S corporation income is reported on a Schedule K-1. You said it wasn’t reported.
Well, no, I said it wasn’t reported by a third party. Partnerships and S corporations provide information for their returns and Schedule K-1 forms for their owners.
Yes, sometimes this can mimic third-party reporting. But owners of these entities have much more control over the reporting than you have over your wages, interest, and dividends.
And you have almost total control over your Schedule C business income reporting. Income may be reported on a Form 1099, but perhaps not all and you have much more wiggle room to claim deductions.
More IRS enforcement will not be directed to checking your W-2 and 1099 one more time. It will not be used to send agents to your door to ask about your W-2 and 1099 forms.
Computer-generated notices are here to stay. But there is a need to check self-reported income by higher-income people. Will Congress do this with its “oversight?” Will it replace the $114 billion?
James R. Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.<br>
