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Sunday, June 25, 2017

20th Anniversary IRS Restructuring Comm'n Report

In the 1990s, tax reform was about as big of a focal point as it is today.  Some of the reasons were rate reduction and international competitiveness. There were a few concerns about IRS activities, such as a technology modernization effort that cost over $2 billion with little results. A commission was created by P.L. 104-52 (11/19/95). This 17-member group was the National Commission on Restructuring the IRS, co-chaired by Senator Kerrey (D-NE) and Congressman Portman (R-OH).

The Commission's report was released on 6/25/97. Its eight sections addressed:

  1. Congressional Oversight, Executive Branch Governance, IRS Management, and Budget
  2. Workforce and Culture
  3. IRS Strategic Objectives: Customer Service, Compliance, and Efficiency Gains
  4. Modernization
  5. Electronic Filing
  6. Tax Law Simplification
  7. Taxpayer Rights
  8. Financial Accountability
The report led to the  IRS Restructuring and Reform Act of 1998 (PL 105-206 (7/22/98)).

E-filing really took off after the Act. A few other items also took place, but not everything. IRS systems are still in need of modernization and there are continuing issues with workforce (such as an aging and declining workforce) and budget deficiencies.

In 2010, TIGTA issued a report - The Internal Revenue Service Restructuring and Reform Act of 1998 Was Substantially Implemented but Challenges Remain.


In April 2017, the AICPA, along with other tax practitioner groups, released a framework for IRS reform, that ties to the 1997 report. The introduction to this report states:


"As we approach the 20th anniversary of the Report of the National Commission on Restructuring the Internal Revenue Service (“Restructuring Commission” or “commission”), we recommend that any effort to modernize the Internal Revenue Service (IRS or “Service”) and  its  technology infrastructure should build on the foundation established by the Restructuring Commission.  The similarities between  the  condition  of  the  IRS  today  and  the  circumstances  that  motivated  the creation of the Restructuring Commission are striking."

The IRS faces many challenges - dealing with a complex tax law, the public's low understanding of what they do, insufficient funding, and technology that isn't as modern as needed.

What do you think?

Saturday, June 24, 2017

One Year Anniversary of House Republican Tax Reform Blueprint


On June 24, 2016, the House Republicans released their "A Better Way" blueprint for tax reform. Obviously as part of an election strategy. On November 9, 2016, with Republican victories all around, I thought there would be fast track activity to draft legislative language to be released early in the 115th Congress.  We haven't seen any legislative language yet although I suspect some exists.

The details of the plan can be found in the full report of the Republicans and a July 2016 article I have on it. The blueprint seems to have hit a few roadblocks, most notably the tax on imports. Note that this is not a tariff. Instead, imports are taxed by not allowing a deduction for them. Likewise, exports are tax-free by removing export revenue from the tax base. The goal is to make the business tax a consumption tax that can be border-adjustable (per the report).

Many taxpayers are not in favor of the import treatment, most notably retailers with lots of imports, as well as oil companies (and others). For example, see the National Retail Federation's website on "BAT is a Bad Tax." [BAT = Border Adjustable Tax]

The import tax though generates a lot of revenue to help pay for lowering the corporate tax from 35% to 20% and the maximum tax on passthrough business income from 39.6% to 25%.  So, it is an important part of tax reform.

The blueprint includes several simplifications and several open questions to be resolved. Drafting legislative language is difficult as changes have effects on several other parts of the law, transition rules must be addressed, and there were several questions left open in the report.

Meanwhile, it it not identical to President Trump's plan and the Senate doesn't yet have a formal plan. However, this past week, Senate Finance Committee Chairman Hatch formally asked for suggestions - due by July 17.

Also, on June 20, Speaker Ryan delivered a speech on tax reform to the National Association of Manufacturers. He would like to see tax reform by the end of 2017 [CNBC, "Speaker Paul Ryan tries to save 'crown jewel' of GOP agenda: Tax reform," 6/20/17.]

There are additional agenda items for Congress and President Trump for this year, including work on the Affordable Care Act, passing a budget, and dealing with the debt ceiling.

What do you think? Will we see tax reform by the end of the year?

Wednesday, June 21, 2017

Testimony to Senate Small Business Committee for AICPA


On June 14, 2017, I had the privilege to testify on behalf of the AICPA before the Senate Committee on Small Business & Entrepreneurship. The title of the hearing - Tax Reform: Removing Barriers to Small Business Growth. A goal of the hearing was for this committee to help the Senate Finance Committee know that they want to be sure tax reform helps small businesses and that such businesses are not forgotten in efforts to reduce the corporate tax rate.

The AICPA's written testimony is at the hearing page and AICPA website. There is a good summary of the hearing in Accounting Today, "AICPA tells Senate corporate tax cuts should also go to small business," Michael Cohn, 6/14/17.

In my 5 minutes, our AICPA testimony focused on:

  • Any rate reduction should apply not only to C corporations but also to other entity types (sole propreitors and passthrough entities).
  • The cash method of accounting should not be limited.
  • Small businesses should be allowed to continue to deduct interest expense.
  • The Section 195 start-up expensing amount should be inccreased.
  • The AMT should be repealed.
  • IRS should be modernized and a new executive-level practitioner services unit formed.
  • S. 540, mobile workforce legislation should be enacted (note that HR 1393 passed in the House on 6/21/17)

There is a video of the hearing at the committee website. It was an enjoyable experience and a nice opportunity to discuss tax reform and small business and hear of the concerns of the committee members.

What do you think about tax reform and small businesses?

Sunday, June 4, 2017

IRS Says FAQs Not Legal Authority - Finally!



In May 2017, the IRS Small Business Division issued a memo to field directors to remind them that FAQs and other items posted to the IRS website are not legal authority unless published in the Internal Revenue Bulletin (IRB)! [SBSE-04-0517-0030 (5/18/17)]

Finally!!

I've been writing about this issue since at least 2010 and in 2012 had the opportunity to discuss the issue with IRS, Treasury and congressional staff.

See:
  • Nellen, How Heavy is an IRS FAQ?AICPA Tax Insider, 11/11/10
  • Horwitz and Nellen, FAQs: Problems with InformalGuidance from the IRS (2012) by Horwitz and Nellen, presented to staff of House Ways & Means, Senate Finance, Joint Committee on Taxation, IRS Chief Counsel, Treasury, as well as to National Taxpayer Advocate Nina Olson and her staff, as part of the California Bar Tax Section DC Delegation activity of May 2012.
My concern with so many FAQs (see the paper above with Robert Horwitz) is that it means less time is spent on issuing binding guidance. There are numerous examples, such as CCA 201504011 (1/23/15) that holds that in measuring cost of sales for a marijuana business, the inventory rules in existence when IRC Section 280E was enacted (1982) apply rather than current rules, such as Section 263A. Section 280E is the provision that disallows expense deductions for marijuana businesses, but does allow cost of sales. Some try to lessen the impact of this rule by using the Unicap rules of Section 263A to treat more type of costs as inventoriable rather than as period costs. Why wasn't the CCA issued as a revenue ruling to be binding. Yes, more IRS and Treasury time would have been required, but it would have greater effect.

What do you think?

Friday, May 26, 2017

Gig Workforce and Portable Benefits



On May 25, 2017, Senator Warner (D-VA) and Congresswoman DelBene (D-WA) introduced H. 1251 and H.R. 2685, Portable Benefits for Independent Workers Pilot Program Act. It calls for $20 million of grant dollars for states to study and pursue innovative ways to provide portable benefits to "the growing independent workforce."

Per Senator Warner: "Whether by choice or necessity, a growing number of Americans are working without a safety net and have difficulty planning and saving for retirement, health care needs, or on-the-job injuries. The nature of work is changing rapidly, but our policies largely remain tied to a 20th century model of traditional full-time employment.” “As more and more Americans engage in part-time, contract or other alternative work arrangements, it’s increasingly important that we provide them with an ability to access more flexible, portable benefits that they can carry with them to multiple jobs across a day, a year, and even a career. These incentive grants will accelerate experimentation at the state and local levels to better support a more independent 21st century workforce.”

This is a good idea, but puzzling as to why they don't address this at the federal level given the number of provisions regarding workers that exist at the federal level. For example, only employees get unemployment benefits, not contractors. Retirement plans differ for employees versus contractors. Why not modify these rules to address the fact that even if someone is an employee rather than a contractor, they will have numerous employers over their careers. They all need portable benefits.


Why aren't federal tax reform discussions also focused on trends and modernization of our tax system?


What do you think?