Budget: Taxes and the IRS

February 16, 2011

The President’s budget proposal would reduce the deficit by $1.1 trillion over the next decade—two-thirds from spending cuts and one-third from tax increases.

Taxes 

The budget request offers a three-year paid-for patch for the Alternative Minimum Tax (AMT) and calls on Congress to work with the administration on budget-neutral corporate tax reform. Tax increases include allowing the 2001 and 2003 tax cuts for high-income earners to expire beyond 2012 and limiting the value of the itemized deduction for those same earners.

Specifically, beginning in 2013, the top rate on upper income taxpayers will rise from 35 percent to 43.4 percent. It continues to press for taxing capital gains and dividends at 20 percent for those upper income taxpayers, as well. They are both at 15 percent for the next two years, with the dividend rate scheduled to return to 39.6 percent while the capital gains would revert to 20 percent in 2013.

On the estate tax front, the President calls for returning to the 2009 rules of a $3.5 million exemption and a 45 percent top rate rather than either the current policy ($5 million and 35 percent) or the current law set for 2013 ($1 million and 55 percent.).

The budget mentions corporate tax reform as something they would like to pursue, but does not include any specific details on how they might approach this, beyond that the reform should be budget neutral.

Additionally, the budget proposes to extend a number of business tax provisions set to expire at the end of 2011. It proposes to simplify, expand and make permanent the research and development tax credit. The budget also recommends extending through the end of 2012 the Subpart F financing, and 15-year depreciation recovery for qualified leasehold improvements. Finally, it suggests repealing the Last In First Out (LIFO) method of accounting, and taxing “carried interest” as ordinary income.

1099 Reporting Requirement 

The president’s budget tweaks the much-maligned 1099 tax provision in the health care law, eliminating the reporting requirements for goods over $600 but keeping the requirement for services. This change is not satisfactory to small businesses, and now the House Ways and Means Committee is set to mark up two 1099 repeal bills on Thursday, Feb. 16.

One bill repeals the requirement without a pay-for; the other, from Chairman Dave Camp (R-Mich.), covers the cost of undoing the provision by increasing the amount of money people who misreported their income to qualify for insurance exchange subsidies must pay back.

IRS Budget Request

In the fiscal year 2012 budget request, the administration is asking for more than $13.3 billion for the Internal Revenue Service (IRS) to implement programs to meet its key strategic goals.

The IRS budget request—an increase of $1.2 billion over enacted FY 2010 spending—includes an increase from 2010 of $460 million for IRS’s enforcement program to handle new information reporting requirements and enforce return preparer compliance. The additional resources will address the underreporting of income connected to international activities and expand enforcement efforts to target noncompliance among corporate and high-wealth taxpayers.

The budget estimates that the enforcement allocation will generate almost $1.3 billion in additional annual enforcement revenue once the initiatives reach full maturity in fiscal 2014.

The administration requested $333.6 million for IRS’s business systems modernization program to finish migration to the new taxpayer account database (CADE 2) and continue expansion of the Modernized e-File program, according to the budget. A further $33 million would be allocated to improve the infrastructure of the IRS website and redesign it to satisfy taxpayer needs and the increasing demand for more electronic services.

The administration’s budget proposes an increase of more than $66 million from the 2010 enacted level to IRS’s taxpayer services account, providing more resources “to improve the quality and efficiency of telephone service” and technological enhancements that will boost electronic filing capabilities by making more electronic forms available.

The $14.04 billion Treasury Department budget includes a request of nearly $158 million for the Treasury Inspector General for Tax Administration, including more than $157 million from direct appropriations and about $1 million from reimbursable agreements.

The greenbook also contains numerous revenue proposals aimed at reducing the tax gap, strengthening tax administration, and simplifying the tax code.

Please click here for a broad overview of the President’s budget.

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