IRS Changes May Mean Frustrating Tax Season Ahead

The Internal Revenue Service began accepting tax returns for 2014 this week. As if taxes aren’t painful enough, the IRS’s own top taxpayer advocate and the commissioner himself are warning that this year’s season could be one of the most dreadful yet.

Tax season may be ‘miserable’

That’s because of budget cuts approved by Congress that give the IRS its lowest level of funding since 2008. This year’s budget is about $10.9 billion, a billion less than five years ago. As a result, there will be an estimated 12,000 fewer IRS employees to process returns, issue refunds and answer phone calls.

The biggest impact from the staff reduction could be longer wait times for those of us calling the IRS. While the IRS has never been known for great customer service, this year is looking particularly grim. More than 100 million people attempt to call the IRS each year and fewer than half will speak to a human being this year. For those who do, the expected wait time is 30 minutes.

United States Taxpayer Advocate Nina Olson writes in her 2014 annual report to Congress that she and her office “do not think it is acceptable for the government to tell millions of taxpayers who seek help each year, in essence, ‘We’re sorry. You’re on your own.’ ” Even IRS Commissioner John Koskinen concedes that the upcoming tax season will be “miserable,” so taxpayers should be aware and plan accordingly. Koskinen strongly encourages taxpayers to visit IRS.gov as a first stop for information ranging from the status of their refunds to tips on resolving tax issues — and to file their taxes electronically.

Oh, another negative to that hiring freeze? It means a lower ratio of auditors to returns, potentially costing the U.S. government more than $2 billion in uncollected revenue.

File electronically for free

Although taxpayers can still file paper returns, the IRS encourages everyone to file electronically, and most do: More than 80 percent of returns this year are expected to be filed electronically. According to IRS Commissioner John Koskinen, “If you haven’t already, you should consider filing electronically. It’s fast, accurate and the best way to get your refund quickly.” Like last year, the IRS expects to issue more than nine out of 10 refunds within 21 days. Since it takes the IRS staff longer to process paper returns, and the IRS is understaffed (more on that below), those refunds are expected to be issued in seven weeks or more. Moreover, taxpayers who “e-file” make fewer mistakes and it costs nothing for those who choose Free File.

The IRS Free File program provides two free electronic filing options for taxpayers:

• Brand-name software, offered by the IRS’s private-sector partners to about 100 million individuals and families with incomes of $60,000 or less.
• Online fillable forms, the electronic version of IRS paper forms, available to taxpayers at all income levels and especially useful to people comfortable with filling out their own returns.

Important tax changes in 2015

The IRS recently announced changes to the tax code going forward. I’m highlighting some of those updates to keep in mind when you’re preparing your 2015 tax returns in 2016.

Inflation adjustments:

• Each year, the IRS adjusts more than 40 tax provisions for inflation, including the tax brackets. This is to prevent “bracket creep,” a phenomenon by which people are pushed into higher tax brackets or have reduced value from credits or deductions thanks to inflation rather than an actual increase in real income.
• The maximum earned-income tax credit increases from last year’s $6,143 to $6,242 this year for those filing jointly who have three or more qualifying children.
• The personal exemption is now $4,000 compared with $3,950 in 2014 and phases out at higher income levels.
• All of a child’s unearned income above $2,100 will be taxed at the parent’s tax rate; that figure was $2,000 in 2014.

Retirement:

• The 401(k) contribution limit increases to $18,000 from $17,500.
• The catch-up contribution limit increases from $5,500 to $6,000.
• The IRS is limiting nontaxable IRA rollovers to one every 12 months regardless of how many individual retirement accounts one has.

Health care:

• The penalty for not having health insurance increases to $325 (or 2 percent of income, whichever is greater) from $95 in 2014 (or 1 percent of income, whichever is greater).
• Employees can save $2,550 in an FSA (flexible spending account), up from $2,500 last year.
• Employees had a “use it or lose it” rule, but you’re now permitted to carry over $500 from one year’s FSA into the next year; HSAs (health savings accounts) are more popular because they do not have such provisions and the contribution limit is higher.

If your finances are complex, consider hiring a trusted tax professional for help. While preparing your own taxes can save you perhaps hundreds of dollars, those individuals with high incomes, who own their own business or who have a variety of investment vehicles will likely find that the expense of hiring a good accountant is far outweighed by the potential tax savings and peace of mind that comes with their expert advice.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors LLC. Her column on women, families and building wealth appears each Saturday in The Tennessean.