Last week, I attended the ABA’s annual Tax Section May Meeting in Washington, D.C. It’s where I can ask 199 attendees about Section 199A of the Tax Cuts and Jobs Act and hopefully not get 199 different explanations. While there were many excellent presentations at the conference, some parts stood out.
The IRS is Hiring
IRS Commissioner Charles Rettig announced that the after a very long hiring freeze, the IRS is hiring in just about every sector, including Large Business and International, Small Business/Self-Employed, Office of Chief Counsel, and Criminal Investigation, to name a few. This is good news for those who want to work for the government. This can also mean that the private sector will also increase their hiring in response to increased audits, criminal investigations, and litigation. Whether state tax agencies will also follow suit remains to be seen.
The IRS Is Looking To Modernize
Unfortunately, the IRS sometimes stands for “Is Really Slow.” Most people wait an average of at least an hour before they are connected to a representative. To mitigate this, the IRS is experimenting with alternative methods of communication, including text messaging and secure messaging to communicate and exchange documents. According to preliminary studies and surveys, both taxpayers and IRS staff found these features useful.
The IRS also plans to expand the use of email to communicate with taxpayers but certain requirements must be met. The most notable of these is that the taxpayer must use Microsoft Outlook and both the taxpayer and the IRS representative must first meet in person to verify identities.
Another problem the IRS has is with face-to-face meetings with the Appeals department. Until a few years ago, the IRS appeals division handled most of their conferences with taxpayers over the telephone. This caused problems where complex documents needed to be reviewed. And most tax professionals representing their clients generally received better outcomes in a face-to-face meeting.
At the conference, the IRS demonstrated their experimental WebEx video conferencing. This allows the IRS and the taxpayer to have a virtual face-to-face meeting. Documents can be shared and viewed by both sides. One of the demonstrators was an appeals officer from Hawaii who was up at 4 a.m. local time, presumably to prove that the WebEx system can work even when both parties are in opposite sides of the country.
No one knows for sure when these experimental technologies will be used in a greater capacity. The main concern the IRS has is ensuring that the communications are not intercepted or hacked. And they will likely need funding. But from what I have seen, these new communication tools show a lot of promise and can eliminate a lot of dead time for taxpayers and tax professionals.
One thing the IRS can do is establish a call-back system instead of placing taxpayers on hold. California’s Franchise Tax Board has this. Basically, it gives the taxpayer an option to have the Franchise Tax Board call them back when it is their turn to speak to a representative. This was a great alternative to being placed on hold.
Taxing The Shared Economy
Online platforms like Uber and Airbnb have turned the internet into a virtual marketplace for sellers and purchasers of goods and services. Some participate in the shared economy (or gig economy) for supplemental income and others do it as a full time source of income. But most are probably somewhere in between.
However, it creates some tax ambiguities and the current tax law creates an incentive to underreport income. For the sellers, are their activities considered a trade or business and subject to the self-employment tax? Should the sellers be given a Form W-2 or a 1099? And who should issue these forms, the online platform or the purchasers themselves?
So are sellers W-2 employees of the online platforms or independent contractors? This has created some controversy with arguments going both ways. Those who want employee status do so because of the potential for health insurance, unemployment benefits, and other state employee-protection laws. Independent contractors prefer this status because they pay less taxes due to more deductions being available to them.
As for income reporting, it seems obvious that the online platform should send the forms to the sellers. After all, the platforms facilitate the transactions, they have records of them, and they have the money to automate the accounting and input them into the proper forms. Generally, online platforms are required to issue 1099s if the seller receives more than $600. But for all transactions made by credit cards, the platforms issue a Form 1099K which has a different reporting requirement. Specifically, merchants must receive a Form 1099K if they have more than 200 credit card transactions and does more than $20,000 in sales annually.
Most small-time sellers on online platforms will not earn $20,000 in a year nor have 200 transactions and so will not get a Form 1099K. So they can potentially get away with not reporting this income on their tax returns and not paying taxes on them unless they withheld properly, live within their means, feel it is their moral and civic duty to report the income themselves, and have nothing but the utmost respect for our elected government officials and how they decide to spend our tax dollars and enforce the law.
Some platforms still provide information for tax reporting even if they do not meet the Form 1099K reporting requirement. For example, Uber issues a tax summary statement to its drivers where it lists income, deductible administrative fees, and the number of miles driven.
It remains to be seen whether online platforms can feasibly issue 1099s to their sellers so they can accurately report their income for tax purposes.
Finally, I attended some seminars that addressed the inequality in the tax system.
For example, temporary (and low-paid) immigrant workers with H-2A worker visas may be paying more taxes than they owe because of language barriers and employers who are not familiar with special tax rules applicable to them. For example, H-2A visa holders are exempt from FICA payroll taxes and income tax withholding requirements. Employers who do not regularly hire H-2A visa workers will not know this. Getting refunds may be problematic if they do not have a U.S. bank account or a U.S. address and have left the country after their visa has expired.
At the same time, another seminar noted that the IRS has dropped the number of criminal investigations from 2014 to 2016, presumably due to a lack of funding. The IRS’s Global Wealth Unit, formed in 2009 to audit high-net-worth individuals, went from an initial staff of 242 to 58 according to ProPublica.
Commissioner Rettig’s initiative to increase the IRS’s staff could be a game changer. In his speech, he stated that the IRS needs a strong, visible, robust enforcement mechanism and he hopes to implement this sooner rather than later.
The May tax conference had something for everyone — from pro bono to M&A. One topic the conference didn’t cover was dealing with the cancellation of debt income when student loans are forgiven. Maybe next year.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at email@example.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.
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