By Scott Curley, co-CEO of FinishLine tax solutions.
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The Fed raises interest rates. Prices for food and fuel are skyrocketing. are signs points to a recession on the horizon. And as we approach the end of 2022, tax time — that time of year everyone looks forward to (sarcasm) — is also on the horizon.
The upcoming tax season can be a source of stress for taxpayers with a newly strengthened Internal Revenue Service ready to go. As co-CEO of a tax consulting firm, I’d like to outline how a recession would impact taxpayers and how the IRS will respond.
Why the US is facing a possible recession
Mainly because of the pandemic, 2020 and 2021 were anomaly years in terms of revenue collection for the IRS. During the Covid-19 outbreak, the IRS cut back on tax collection by more than 80%. This was to give citizens a financial reprieve through the crisis.
At the same time as the IRS eased its collections efforts, the Federal Reserve was printing and pumping money into the economy in the form of stimulus checks, loans and grants for the Payroll Protection Plan. The extra money in circulation devalued the US dollar and ultimately created an inflationary state that the Treasury Department is now trying to correct with the Inflation Reduction Act (IRA).
As a result, there are rising prices when there is inflation. And with rising prices, there is a risk of recession.
The Inflation Reduction Act
The IRA came into effect in August 2022 and has many facets. Its provisions aim to reduce the deficit and to invest in domestic energy production and clean energy. One of the provisions provides for hiring 87,000 IRS agents in the next 10 years.
This is an attempt to recoup the money put into circulation during the pandemic. It is also one of the indicators that the grace period that many people experienced during the pandemic is coming to an end.
Theirs
I think it’s from the IRS leniency in collecting tax revenue during the pandemic is a once-in-a-lifetime event. There is nothing to indicate that this will ever happen in the future.
To me, the recent increase in hiring at the IRS indicates that a recession won’t affect how the government makes sure Americans meet their tax obligations. I expect the IRS to pursue tax collection during a recession as aggressively as it does during a robust economy.
There are two reasons for this. Firstly, the Tax and Customs Administration cannot discriminate. It cannot arbitrarily decide that it will strive for collections more vigorously during one period than another, or against one group over another. Second, the IRS’s collection system is automated. As such, it pays no attention to the state of the economy.
The automated collection system (ACS)?
Designed to be consistent and unbiased, the Automated Collection System (ACS) is the massive computer system at the IRS designed to indiscriminately collect tax dollars from the American people. It actually consists of two parts: the computer system that generates the messages that are sent to taxpayers and the phone bank of ACP agents that receive the calls from taxpayers listed on those messages.
By law, the IRS cannot cause financial hardship when collecting a tax debt. However, the IRS is the agency that determines what constitutes a financial hardship. The ACS deals with tax debts of $100,000 or less.
Exceptions to the ACS
The only time a tax collection problem becomes subjective is when it is assigned to a tax official. This doesn’t happen often. The IRS likes most tax collection issues to be handled quickly, which is why they prefer the ACS to handle it.
When a tax collection issue is taken out of the ACS and assigned to a tax officer, it becomes a person-to-person issue. When a taxpayer calls the ACS, the agent you speak to will be the first available. When dealing with a tax official, you are dealing with a person assigned to the specifics of your case.
Collect trends
With the notable exception of the Covid crisis, the IRS has never stopped its collection efforts under most economic conditions. There are ebbs and flows, but what has happened in the past year and a half has been unprecedented.
As a result, taxpayers are being pressured by the IRS use tactics such as levies, liens, garnishments and repossessions to collect outstanding tax debts each year. The IRS is the only entity in the country that can seize assets and garnish wages without a court order.
This extreme power means that taxpayers must solve tax problems; it’s not an option. Many people think that resolving their tax issue is optional, but they have no choice. You just have to decide whether you want to solve your tax issues on your terms or theirs.
Be proactive
As a business leader, it’s important to be proactive and recognize your limitations. Don’t try to fool the IRS and cut corners because it never works out. Once a taxpayer is on their radar, the IRS has all legal rights to prosecute and investigate the person or company for up to 10 years. This can ultimately destroy a company if the IRS recognizes that they are not operating properly or in a way they consider illegal. Therefore, business owners need to gain knowledge on how to resolve and handle their taxes and IRS matters, or hire a professional who will make sure they manage their taxes correctly and stay on time.
The fact is that all IRS cases will be resolved. The question leaders need to ask themselves is: Do I want the case resolved on my terms or the IRS’s terms? With some control over how they are resolved, it is always better for a taxpayer who knows they have a tax problem to be proactive and assertive rather than doing nothing. Taking no action means the IRS can resolve the issue on their terms.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.
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