ASK THE EDD ATTORNEY – WHILE THE IRS IMPLODES, THE EDD EXPLODES
By Robert S. Schriebman
November 3, 2015
The IRS has been battered by severe budget cuts. According to the IRS Commissioner these budget cuts will continue. There have been drastic reductions in the percentage of tax returns being audited. There have been severe personnel cut backs. Experienced senior personnel are leaving the IRS at an alarming rate. On the other hand, the EDD is acquiring new personnel in the areas of audits and collections. It looks like there will be more worker status audits with increased emphasis on fringe benefits being treated as additional compensation. Employers will be subject to larger assessments with increased emphasis on harsh penalties.
The Shrinking IRS – Drop In The Number of Audits
On October 23, 2015 IRS Commissioner John Koskinen made a speech before the Council for Electronic Revenue Communication (CERCA) in Arlington, VA. What the Commissioner said may have dire consequences to both the IRS and the American taxpayer. Mr. Koskinen pointed out to CERCA that for the last 3 fiscal years the percentage of IRS audits has been shrinking with the fiscal year 2014 being the lowest in memory. For the fiscal year 2012 the percentage of returns audited were less than ¾ of 1%, i.e., 0.71%. For the fiscal year 2013 the audit percentage shrunk to 0.61%. The audit percentage for the fiscal year 2014 was an alarming .057%. Historically, around 2% of filed tax returns got audited. I have been practicing tax law for decades and I have never seen the audit rate so low.
Drop In IRS Personnel
The IRS has lost about 15,000 full-time employees; 1/3 of this number includes key enforcement personnel. That is about 5,000 experienced and knowledgeable tax administrators. I will get to the specific numbers shortly. How long will it take to replace these “man-years” of experience?
The Shrinking IRS Budget
Commissioner Koskinen informed the members of CERCA that President Obama proposed to fund the IRS at $12.9 billion for FY 2016. But Koskinen said “We are not going to get the full FY2016 budget.”
Drop In The Collection of IRS Taxes
There has been about a 1/3 drop in the number of IRS collection personnel nationwide, from about 6,000 to about 4,000. At the same time there has been almost a 50% drop in the amount of IRS levies and almost a 50% drop in the filing of IRS tax liens. IRS field collection revenue officers have been told to place their emphasis on investigating and collecting employment and withholding taxes (payroll taxes). It is now unlikely that you will get a knock on the door from IRS collectors unless you owe over $1 million. This is what I was told at the UCLA Tax Controversy Institute held on October 27, 2015.
The IRS does have a very effective Automated Collection System known as ACS. ACS is responsible for sending the several basic collection bills including those sent by certified mail. If your bank account is levied or your wages garnished, the chances are it is being done by ACS as opposed to being done by hand through a field revenue officer. Field revenue officers are busy doing other things. ACS will continue to be the backbone of the frontline IRS collection process. However, ACS does not pursue collection efforts on large tax deficiencies.
Is Our National Voluntary Compliance System In Jeopardy?
The United States has one of the highest taxpayer voluntary compliance systems in the world. The cornerstone for our system of taxation is the basic belief that the American taxpayer is honest and properly reports his or her income and tries to take only those deductions that are within the law. Reasonable people can differ on what may be an allowable business expense or charitable contribution. It is true that there is a built-in fear of the IRS, but the IRS on the whole has become more tax-payer friendly since late 1990s. In the end, we are not a nation of tax crooks. However, the knowledge that the IRS audit rate may be the lowest it’s been in living memory, and that tax collectors are only concerned with collecting deficiencies that exceed $1 million, may be just too tempting. Only time will tell. Democratic administrations, in contrast to Republican administrations historically have been more liberal in funding the IRS, but not the current administration.
Caveat: Clients often ask me what the probability is of being audited if they take certain deductions or omit the reporting of income. My answer has always been the same: Regardless of what the official audit rate is from Washington, if your return gets selected for audit, the odds are 100%! Therefore, I want to make it clear in this article that I am not advocating in any way cheating on any tax return – State or Federal.
The EDD Is Getting Busier
I am seeing an increase in EDD audit activity in larger EDD offices. Potential audit files that were inactive for months are now being assigned to new auditors. In addition to the increase number of audits I am also seeing the EDD expanding its request for documentation to include bank statements, cancelled checks, and credit card statements. The credit card statements are being closely examined to see if a corporation is paying personal expenses of officers and key employees for such things as vacations, meals and entertainment, and other expenditures that should have been paid by these executives out of their own pockets. The EDD is assessing payroll taxes on these expenditures. In addition to assessing payroll taxes, EDD auditors are assessing Worker Information Return Penalties pursuant to CUIC 13052 and 13052.5. These penalties are over 12% of the amount of additional compensation. These penalties are subject to immediate collection action and cannot be appealed to the CUIAB unless and until they are paid in full. They may result in stressful and costly superior court refund litigation.
Serious budget cuts within the IRS bode for an uncertain future for the American taxpayer. Audits are shrinking and collection efforts seemed to be focusing on the collection of payroll taxes and also in criminal enforcement. While our system is based on voluntary compliance there is also an element of fear when it comes to the IRS. If this fear factor is removed it is anybody’s guess what the IRS will look like 5 years from now.
The California Legislature has finally realized that the EDD can be a major money-maker. When I wrote my first book on the EDD I was told by the then director that the EDD was called “The Unknown Agency.” California focused on the revenues generated by the FTB and SBE. No one paid too much attention to the EDD. Not anymore.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.
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