TAX NEWS
	SPRING 1997

IRS COMMISSIONER RESIGNS

IRS Commissioner, Margaret Milner Richardson (age 55) has announced her intent to resign. In her letter of resignation, Richardson praised IRS officials for their dedication and professionalism in attempts to improve service to taxpayers “at a time of unprecedented attack upon the tax system and those who administer it.” [Editor’s Note: As we go to press, President Clinton has not named a new Commissioner and pressure is building for the appointment of a “management type.”]

SOCIAL SECURITY PULLS THE PLUG

The Social Security Administration has suddenly put on hold its month-old on-lie service that provided individual access to Personal Earnings and Benefit Estimate Statement. For at least four weeks, individuals could reach the data via the Internet. At least 28,000 people had made requests over the 30 day period. The “hold” comes as a result of privacy claims that were made in and out of Congress. In the words of USA TODAY “the Social Security Administration, trying to speed service and cut costs by using the Internet, inadvertently has compromised the financial privacy of tens of millions of Americans.”

Requests can still be made by mail. Request Form SSA-7004 PEBES at any of the Social Security Administration offices or by calling 1-800-772-1213 and answering 5 general questions.

BROWSING IS BAD

The IRS has fired 23 employees, disciplined 349 and counseled 472 other workers after agency audits found that government computers were still being used to browse through tax records of friends, relatives and celebrities. The IRS data, covering fiscal years 1994 and 1995, listed 1,515 cases of computer misuse. 33% of the cases were closed and 12% took early retirement or were cleared.

EXPERIMENTAL CPI

By now everyone is aware of the national concern over the calculation of the Consumer Price Index. In the Winter, 1996 Client Newsletter (page 4) we reported the fact that some experts have claimed that the index is overestimated by 1.0 to 1.25%. It was suggested by this publication in December that a change to the calculation could help to reduce the federal budget deficit by up to $261 billion over six years. Unfortunately, such a change could come at a price to some taxpayers. It is important to keep in mind that millions of Americans receive payments (social security, military retirement, union wage agreements, etc.) that are tied in to the CPI calculation.

An experimental consumer price index released on April 10th showed that the lowest inflation rate in a generation might have been even lower than the government reported. Using an experimental approach to computing how much consumer prices rise each year, the Labor Department said that the CPI rose 2.9% in 1996 rather than the 3.3% officially reported. The report supports the view that the government is overstating inflation.

Want to check up on the CPI? The Bureau of Labor Statistics has a recorded phone message (1-202-606-6994) “the CPI Quickline” with the latest figures. [Editor’s Note: As we go to press with this issue progress is being reported between the President and Congress on recalculating the CPI downward. Such an agreement may be necessary to reach an overall agreement on balancing the federal budget by 2002.]

INTEREST RATE INCREASE

Now that you have accepted the fact that the Federal Policy Committee (Chairman, Alan Greenspan) raised the national rate by 25 basis points (.25%) get ready for a second hike on May 20th (the Policy Board’s next scheduled meeting). While announcing the rate increase, Greenspan noted that “it’s very hard to find any evidence of mushrooming of inflationary pressures at this point.”

[Editor’s Note: While the March 25th rate increase can be viewed by some as a “preemptive” strike, some experts have predicted future rate increases over the next 12 months. There could well be a 1.0% total increase over the next year according to Thomas Cooke, Executive Director of the National Society of Tax Professionals. Cooke has suggested that “the likelihood is another .25% rate increase on May 20th.]

TAX CUTS: WHAT AMERICANS ARE THINKING

A recent USA TODAY/CNN/GALLUP Poll showed that 70% of American taxpayers want tax cuts kept in any budget agreement reached this year. A majority (52%) say that tax cuts and deficit reduction can be accomplished at the same time; 42% said they cannot.

PICK YOUR IRS DELIVERY SERVICE

At long last taxpayers were given some alternatives for their last minute tax filings. The IRS announced on April 10th (could they have waited any longer?) that taxpayers could use any one of four private delivery services. Airborne Express, DHL Worldwide Express, Federal Express and UPS were the winners. The Taxpayer Bill of Rights 2 (enacted in August 1996) required the IRS to give taxpayers more choices.

HAVE MY EMPLOYEES FILED THEIR RETURNS?

The IRS will continue a program to help tax firms check up on their employees. The special program allows the tax preparation firms to send in consent forms (signed by the employees). The IRS will answer the request with a simple “yes” or “no” to the “fact-of-filing” program. The IRS program, offered since 1993, is limited to individual income-tax returns for tax years 1994-1996. The Wall Street Journal reports that some firms fear that their employees would be insulted by being asked to sign such a consent form.

MORE CHOICES....BUT FEWER GIVE

Taxpayers in 41 states and the District of Columbia were able to check boxes on their 1996 state income tax returns and donate a portion of their refund to a record 160 charities. According to recently released data (1995), contributions fell in 25 of 41 states and the District of Columbia. For 1995, contributions dropped to $24.3 million, off almost 20% from their peak.

E-FILING GAINS MOMENTUM

After a slow start in January - February, March 1997 witnessed a boom in electronic filing when compared to the 1996 filing season. Electronic filing reached its peak in 1994. The number of returns filed electronically took a serious dip in 1995 after anti-fraud efforts by the IRS dampened the market for refund anticipation loans and consequently for electronic filing. Some of the factors cited as causing the increase in 1997 over 1996 and 1995 include a sharp drop in IRS rate of rejection of returns, a smooth season for most tax software vendors and the growing number of state electronic filing products.

1997 TAX SEASON BOX SCORE

*through April 4th

IRS TARGETS TAX-DRIVEN TRUST SCHEMES

Setting up trusts that purposely avoid big bucks in taxes could end up costing taxpayers. Just in time for the April 15th (initial) filing deadline, the IRS sent out an ominous press release that warned taxpayers not to set up “abusive trusts” that hide the true ownership of assets of the substance of transactions. The IRS press release stated that it has pinpointed about 200,000 questionable trusts that hold roughly $1 billion in business and personal assets.

HOUSE VOTES TO ALLOW COMP-TIME OPTION

By a vote of 222-210 (March 19th), the House narrowly approved a Republican proposal that would allow workers to take time off rather than receive overtime pay. The measure, if enacted into law, would amend a 1938 law requiring overtime pay for most hourly employees who work more than 40 hours a week. The measure would allow private-sector businesses to give workers the choice of taking 1 hour of paid time off instead of time-and-a-half pay. President Clinton has threatened a veto unless substantial changes are made to the bill.

TAXPAYER ADVOCATE ISSUES REPORT

The 1996 Taxpayer Bill of Rights 2 called for the appointment of a Taxpayer Advocate. The newly appointed Taxpayer Advocate is Lee R. Monks. According to Monks, complexity is an “underlying cause of may, if not all, of the most serious problems encountered by taxpayers.” In a report recently issued to Congress, Monks cites difficulty in reaching the IRS by phone and a “lack of clarity and inappropriate tone.” Monks claims that IRS notices don’t provide “an adequate explanation of the reason” they are being sent to taxpayers and they “take the same tone and approach toward taxpayers with spotless compliance histories as toward those with long histories of intentional noncompliance.” Monks claims that taxpayers say complexity is their biggest problem even though some 70% take the standard deduction. The Taxpayer Advocate’s office has recently released data showing that the IRS answered 68% of the 1997 calls to its toll-free number - up from 46% of 97.5 million calls during 1996.

THE TOP 20 LIST

In issuing his first report to Congress, Taxpayer Advocate Lee R. Monks has identified 20 items as the most serious problems facing taxpayers today. The list includes:

ARE YOU ORGANIZED?

A majority of 150 business professionals surveyed said that they waste at least 1 hour a day because they are unorganized. The survey, conducted by Video Arts of Chicago, also reported that some 20% of the professionals claimed to be “buried in paper.”

TAX PROFESSIONALS SURVEY

Your Tax Professional is in the process of completing a very important National Tax Survey. The 1997 Tax Survey was mailed to over 18,000 tax professionals on April 16th and seeks their opinion on a number of tax issues important to you - the taxpayer. The results of the 1997 Tax Survey will be communicated to the President, Congress, the Internal Revenue Service, the media and to YOU the most important part of the process. Look for the questions and the results in your SUMMER 1997 issue of The Client Newsletter (available after July 10th).

“We Can’t Afford a Tax Cut” by former Senators Warren Rudman (R-NH) and Sam Nunn (D-Ga.)

By this time of the year, the US government will add approximately $700 million to the national debt. Over the next four years, another $1.1 trillion will be added to the debt by Congress and the President, bringing the grand total close to $6.4 trillion.

In light of these startling facts, how can a big tax cut be responsible? The answer is it can’t.

In the current debate over whether or not to delay a tax cut, the wrong questions are being asked. It’s not a question of whether American taxpayers want or deserve a tax break. The real question is, can the federal government afford a significant loss of revenue at a time when it is already borrowing trillions of dollars from future generations to finance today’s budget deficits? The answer to that question is an emphatic no.

Wait a minute, politicians will protest, the deficit has declined over the past four years, leaving plenty of room for a tax cut.

What is worrisome about this argument is that last year’s deficit of $107 billion appears to be the closest Congress and the President can come to a balanced budget during a uniquely favorable moment in history. The world is not likely to indefinitely remain as peaceful or recession-free as it is today.

We know for certain that today’s favorable demographics will not last much longer. For the next dozen years, the large “boom” generation will remain in the work force, while a small “depression” generation will be retiring.

But when 76 million baby boomers become senior boomers early in the next century, look out. Official projections show that our annual deficits, driven by Social Security and Medicare spending, will rocket through the stratosphere.

In a recent publication sent to lawmakers in both parties, the non-partisan Congressional Budget Office warned that our current plan for dealing with this demographic tidal wave “is unsustainable, and attempting to preserve it would severely damage the economy.”

Rather than debating whether to cut taxes, our politicians in Washington should be preparing right now for this fast-approaching challenge by saving and investing more on behalf of young workers.

To make this possible, we should balance the budget by 2002, and even plan to run budget surpluses and begin to retire debt through the first decade of the next century. Today’s budget problems are tough enough. A large tax cut at a time when we can’t even afford our current level of government could easily make tomorrow’s impossible.

Promising voters big tax cuts may sound like good politics but the long-term result of this policy could be disastrous for all Americans.

Let’s balance the budget, put our skyrocketing entitlement programs such as Social Security and Medicare on a sustainable path, and restore our long-term economic growth first. Then, after we’ve done the heavy lifting necessary to secure this country’s future, we can talk about what will be a well-deserved tax cut, and how to pay for it.

If tax changes are made, including fundamental tax reform, the changes should promote savings and be deficit-neutral, with tax cuts financed by closing tax loopholes.

Observing Rome in decline, the ancient historian Livy once wrote that its people “could neither stand their ills nor their cures.”

At the Concord Coalition, we optimistically believe that this is not true of the American people. While some politicians promise endless free lunches and cynically conclude that voters can no longer bear to face the truth, we are more hopeful.

We believe Americans appreciate the difference between substance and rhetoric, and will judge their leaders accordingly.

[Editor’s Note: Former Senators Rudman and Nunn are co-chairmen of the Concord Coalition in Washington, DC. This article was distributed by Scripps Howard News Service. The article appeared in the April 18th issue of The Journal of Commerce.]

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