It’s impossible these days to listen to or read the media or view social media posts without finding out something about the IRS. In 1998, Congress enacted the Internal Revenue Service Restructuring and Reform Act. It passed unanimously in the Senate and made significant changes in IRS rules as well as tax rules for taxpayers. Looking back, let’s see how the changes worked out and where we stand now.
Impact on taxpayers
There were a number of favorable tax changes enacted 25 years ago, including:
- A reduction in the holding period for long-term capital gain from 18 months to 12 months. The more-than-one year holding period still applies today.
- The home sale exclusion was set at up to $250,000 ($500,000 for joint filers) for those who owned and used their homes for at least 2 of 5 years on the date of sale, with no age requirement. The exclusion amount has not been adjusted for inflation. In 2023 dollars, it would $476,154 ($952,308 for joint filers).
- It introduced an above-the-line deduction for student interest of up to $2,500 annually. Again, the dollar limit is not adjusted for inflation. If it had been subject to a cost-of-living adjustment, the limit in 2023 would be $4,762.
Impact on the IRS
The law 25 years ago introduced some protections for taxpayers in their dealings with the IRS, including:
- The creation of the National Taxpayer Advocate.
- A limited privilege for communicating with a CPA or other “federally authorized tax practitioner” in non-criminal proceedings.
- Allowing civil damages up to $100,000 if an IRS employee negligently disregards tax laws and regulations.
- Sets certain limitations on collection activities (e.g., no seizure of a personal residence for a tax debut of $5,000 or less).
- Increased the threshold for small tax cases in Tax Court to $50,000 (up from $10,000). It’s still $50,000 today.
Existing problems
It seems that the law that’s now a quarter of a century old didn’t fix all of the issues that taxpayers face in dealing with the IRS. The Inflation Reduction Act of 2022 provided significant funding to the IRS to help the Service address some of these issues.
Now, on the one-year anniversary of this law, the IRS announced it used Inflation Reduction Act resources to launch an ambitious plan — the Paperless Processing Initiative — to ensure that by Filing Season 2024 taxpayers will be able to go paperless if they choose to do so, and by Filing Season 2025, the IRS will achieve paperless processing digitizing all paper-filed returns. The IRS has also improved its live assistance by implementing a customer callback option, as well as expanding in-person assistance through opened or reopened taxpayer assistance centers.
To be sure, there are other taxpayer concerns, especially when it comes to audits. The IRS isn’t hiring armed auditors, but as part of its Strategic Operating Plan announced in April 2023, there are plans to increase the number of audits it conducts on “complex filings of high-income taxpayers, large corporations and complex partnerships.”
Final thought
Most small business owners work with a tax professional, at least when it comes time for filing tax returns. Hopefully, readers of my blogs and other resources are kept abreast of tax changes and know what they have to do.
Just remember, as Benjamin Franklin said nearly 250 years ago: “Nothing is certain except death and taxes.” But what the tax rules are and how much taxes are paid are far from settled. Stay tuned for upcoming tax changes from Congress before the end of the year.
