I agree with the IRS?

Can it be true that I’m in accord with the often-dreaded federal agency? Yes, with regard to recent remarks by Commissioner Shulman. He outlined various reasons why the agency has experienced various tax risks. However, these risks also apply to businesses. Here are some of these reasons (quoted from his remarks) and why I agree:

Impermanence. “In 2010, the Joint Committee on Taxation identified more than 130 tax provisions that were set to expire at the end of 2010, with approximately another 70 to sunset at the end of 2011. And 40 more tax provisions are set to expire at the end of 2012. This year, we actually had a tax provision [the payroll tax cut] that was set to expire in two months. A perfect example of uncertainty for business taxpayers caused by expiring provisions is the Research and Experimentation tax credit. Its purpose is to foster innovation and technological development while spurring economic growth and competitiveness. However, for the past 30 years, it has been extended 14 times, many of those retroactively, for periods ranging from six months to five years. Such persistent uncertainty about the future availability of the R&E credit diminishes its incentive effect as taxpayers often do not know if they can depend on the credit when making decisions on future investments in research and development.”

Why I agree. Right now it is impossible for small business owners to do any tax planning for 2012 or beyond. We don’t know whether dozens of tax breaks that expired at the end of 2011 will be extended for this year. We don’t know what the tax rules will be for 2013 when the Bush-era tax cuts expire at the end of this year. Impermanence is devastating to tax planning.

Retroactive reinstatement of tax provisions. “This creates confusion for taxpayers, and makes it very difficult for the IRS to implement. We have seen provisions expire for almost an entire year, only to be reinstated at the end of the year…. The most recent visible example of this was the expiration of the estate tax at the end of 2009, which was then reinstated at the end of 2010. Upon reinstatement, Congress gave taxpayers the option of using either the 2009 or the new 2011 rules for 2010. This kind of result is not optimal.”

Why I agree. It’s already the third month of the year and we don’t yet know whether the research credit and other business tax breaks will be effective this year. Again, planning under this scenario is impossible.

Legislation with immediate effective dates. This “adds operational risk to the IRS and makes it hard for taxpayers to plan properly to take advantage of tax benefits.”

Why I agree. In November 2011, a new law created two new targeted groups for the work opportunity credit for certain veterans. I venture to say that most employers didn’t learn of this new opportunity immediately and could not take optimum advantage of it. The law made good PR for law makers but poor tax sense for business owners who were in the dark (at least for some time) about the new break.

My suggestions
We need to do something about the tax system now. There should be dialog about what we want the tax system to do: Raise revenue? Implement social policy? Implement economic policy? We should also revert to the tax legislation procedures that operated in the past, when legislation was debated for some time before permanent changes to the tax laws were made.

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