Taxing Definitions

Definitions — Watching the IRS

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Each December, the IRS gets a holiday gift from the National Taxpayer Advocate in the form of a presentation to congress that sums up what’s working – and what’s not. For example, this year, the Advocate says the IRS initiative called “Future State” is the number one most serious problem facing taxpayers.

Future State is an IRS plan to create online taxpayer accounts that would allow taxpayers to access information related to their tax returns and to interact with the IRS. The Advocate points out that those who may most need IRS help typically do not have the necessary access to digital services such as broadband internet. In addition, the Advocate notes that the IRS currently has between 60 and 200 different case management systems, most of which are old and lack intra-system integration.

The Advocate also discusses the strain of the declining IRS budget and the requirement of doing more with less. In fiscal year 2010, the IRS budget was $12.1 billion. For fiscal year 2016, the budget was $11.2 billion, a reduction of nearly 8% over the six-year period. During those years, in addition to the normal work of processing tax returns and enforcing tax law, the IRS had to implement the statutory requirements of the Patient Protection and Affordable Care Act and the Foreign Account Tax Compliance Act.

Here are questions from the December 2016 Taxpayer Advocate Annual Report to Congress (PDF file here).

1. How many penalty provisions are in the current tax code?

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2. The IRS maintains an Individual Master File that is the authoritative data source for individual taxpayers where accounts are updated, taxes are assessed, and refunds are generated, and a Business Master file that retains all tax data pertaining to individual business income taxpayers and reflects a continuously updated and current record of each taxpayer’s account. These are both written in assembly language code—a low-level computer code that is difficult to write and maintain—and operate on an IBM mainframe.

How old do you think these information systems are?

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3. What was the most litigated tax issue during the 12-month period from June 1, 2015, to May 31, 2016?

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4. For the fourth most litigated issue, the Advocate identified 81 opinions issued by federal courts involving gross income. The questions most often fell into two categories: (1) what is included in gross income under the internal revenue code, and (2) what can be excluded under other statutory provisions.

How many of the 81 cases do you think were won by the taxpayer?

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5. The IRS processes more than 150 million tax returns each year. What percentage of returns received show a refund?

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Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided in the post to read the entire case.

This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.

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Right answer!

There are now more than 170 penalty provisions, up from 14 in 1955.

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Right answer!

The Government Accountability Office Report GAO-16-468, Information Technology: Federal Agencies Need to Address Aging Legacy Systems (May 2016) lists the IRS’s Individual Master File (IMF) and Business Master File (BMF) as the two oldest investments or systems at 56 years old each.

Right answer!

The Advocate identified 122 opinions issued between June 1, 2015, and May 31, 2016, where taxpayers litigated the negligence or disregard of rules or regulations, or substantial understatement components of the accuracy-related penalty. The IRS prevailed in full in 86 cases, taxpayers prevailed in full in 20 cases, and 16 cases resulted in split decisions.

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Right answer!

In 32 cases, taxpayers were represented, while the rest were pro se (without counsel). Represented taxpayers prevailed in full or in part in five of 32 cases, and pro se taxpayers prevailed in full or in part in three of 49 cases. Overall, taxpayers prevailed in full or in part in eight of 81 cases.

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Right answer!

The average refund is $2,800.

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