Pricing Your Products or Services

Putting together a pricing strategy

 
For many small businesses pricing products and services is more a matter of guesswork than logic. Mindful of competitor pricing, they make the mistake of simply undercutting to win business rather than carefully working out the price they need to charge – a price that not only covers the cost of doing business, but makes all the hard work worthwhile by returning a reasonable profit.

Straight price cutting in response to competition is a dangerous strategy, one that can ultimately cut your profits to the point where you might as well sell up. Far better to sit down and work out a pricing strategy that reflects the nature of your products and market, AND makes you money!

Covering costs

The first step in developing a pricing strategy is to work out your overheads. It’s really important to identify absolutely everything that costs you money, including rent, wages, utilities, software, and insurance. Don’t forget to include your own salary in this. Also include the cost of servicing capital assets (loan interest and depreciation charges), including any IT equipment and vehicles that you own.

Market research

Once you have identified the costs associated with running your business you can begin to think about how you want to price your product. To get a feel for the market, it’s a great idea to find out what your competitors charge, though it’s inadvisable to base your prices on this alone because they might be offering a different mix of product and associated services, and their overheads are also likely to be somewhat different.

Pricing strategies

Reaction pricing - lowering your price because the person up the road just lowered theirs - is not usually a workable long term solution. A price war means no-one makes money. And if you position yourself as the lowest cost option you run the risk of customers leaving you when another, even lower priced alternative, comes along. Keep in mind that if your customers perceive your price to be too low, it will make them just as suspicious as when they perceive your price to be too high.

Conversely, it’s important not to price yourself out of the market. So instead of just checking what price your competitors are selling at, evaluate the services they offer their customers and whether they market on the basis of any unique core differentiators. Then consider what you can offer. If you feel that what you can do is worth more than what your competitors offer, price your services accordingly. This is called a premium pricing strategy. For it to work, you need to be able to demonstrate your value to your customers in a convincing way and to get the message out among them.

Be prepared to negotiate your prices to win business. Negotiation involves a little planning but is a useful business tool when used properly. To ensure you’re still making money, you need to build in a premium to the initial price quoted and also determine a price floor under which you are not prepared to go.

Another pricing strategy that’s worth considering is straight discount-for-volume. Loss leaders are also an option, as are two-part pricing strategies. Peak pricing (when you charge a premium for made to order products or for work done at the last minute) is another pricing alternative you can look at.

Price increases

Take your time to do some homework on your product offering and selling points when determining your pricing strategy, because, once in place, it’s difficult to change without upsetting customers. If you are planning on raising prices, it’s a good idea to do it incrementally rather than wait for years and then slug clients with a massive price hike.

The best way to start considering pricing is to first step back and get some professional advice on how you can differentiate your product, improve your marketing and deliver great customer service. Then you’ll be able to consider a premium pricing strategy that cashes in on the things that make you different, rather than fighting it out on cost alone.

 
Copyright 2010 Bullseye Business Systems Pty Ltd. All rights reserved. Reprinted with permission from http://www.ranone.com

Homebuyer tax credit is extended

========================

Homebuyer tax credit is extended

========================

If you signed a contract before May 1 to buy a home, but

have been unable to close the deal, you still have time

to apply for the homebuyer tax credit. The deadline for

finalizing the paperwork on your new home has been

extended through September 30, 2010.

Here's what you need to know:

* The extension applies only if you already had a

  contract in place by April 30, 2010. The new deadline

  is available for first-time homebuyers and long-time

  residents.

* The maximum credit remains unchanged ($8,000 for

  first-time homebuyers and $6,500 for long-time

  residents), as do other rules for qualifying.

* You can claim the credit on your 2009 or 2010 federal

  income tax return. You'll have to complete Form 5405,

  First-Time Homebuyer Credit and Repayment of the Credit,

  and attach proof that you meet the requirements.

Not sure if you qualify? We can help. Please call for

more information.

Watch out for this new tax bill!

Watch out for this new tax bill! It passed Congress last week and will go to the Senate after the break. It's expected to pass there quickly as well.If you have an S Corporation, please pay special attention!
 
if the Bill, called the American Jobs and Close Tax Loopholes Act of 2010, passes the Senate, it will take affect January 1, 2011.

If you:

• Have an S Corporation,
• Are involved in professional services if substantially all of the activities of such trade or business involve providing services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services, and
• Have three or fewer shareholders whose 'reputation and expertise' is used in the business.

You will have to pay self-employment tax (15.3%) on any distributions received from the S Corporation.

There are more questions than answers right now. For example:

• What is the definition of professional services?
• What is the brightline definition of "reputation and expertise" ?
• How will this apply to LLCs that are manager-managed? 

Stay tuned. We'll keep you posted. 

Obamacare and the "Rat Tax" - a 1099 NIGHTMARE!

Another Obamacare Surprise... "The Rat Tax"

Why is this provision being coined "The Rat Tax" ? Because it requires companies to "Rat" to the IRS on the companies they do business with. Beginning in 2012, under the new law, businesses will be required to issue form 1099 to every business,  for virtually all purchases.

Changes to the tax code’s section 6041 regarding 1099 reporting were slipped into the 2000-page health legislation. The changes will force millions of businesses to issue hundreds of millions, perhaps billions, of additional IRS Form 1099s every year.

In a recent summary, tax information firm RIA [1] notes the types of transactions covered by the new 1099 rules:

The 2010 Health Care Act adds “amounts in consideration for property” (Code Sec. 6041(a) as amended by 2010 Health Care Act §9006(b)(1)) and “gross proceeds” (Code Sec. 6041(a) as amended by 2010 Health Care Act §9006(b)(2)) to the pre-2010 Health Care Act categories of payments for which an information return to IRS will be required if the $600 aggregate payment threshold is met in a tax year for any one payee. Thus, Congress says that for payments made after 2011, the term “payments” includes gross proceeds paid in consideration for property or services.

Basically, businesses will have to issue 1099s whenever they do more than $600 of business with another entity, within in a year. For the $14 trillion U.S. economy, that’s a hell of a lot of 1099s. When a business buys $601 of office supplies from Staples, it will have to gather information on the seller and mail 1099s to the seller and the IRS. When a small business owner pays his material suppliers, he will have to send a 1099 to the supplier and IRS.

Recipients of the vast flood of these forms will have to match them with existing accounting records. There will be huge numbers of errors and mismatches, which will probably generate many costly battles with the IRS.

This is a huge new imposition on American business, costing the private economy much more than any additional tax that the IRS might collect as a result. What the HECK does this have to do with HEALTHCARE!

In order to file all these 1099s, you’ll need to collect the necessary information from all your service providers. In order to comply with the law, you would have to get a Taxpayer Information Number or TIN from the business. If the vendor does not supply you with a TIN, you are obligated to withhold federal income tax on your payments.

This will most certainly become an administrative and bureaucratic nightmare. No doubt it will waste huge amounts of human effort in filling out forms, reworking computer systems, collecting and organizing data, and fighting the IRS. Just the thing our struggling economy needs. If your not irate yet, what will it take?

Highlights of New IRS "Authority"

A client has graciously sent this to my attention. The House, Ways and Means Committe report outlining some of the new "Authority" the healthcare bill grants to the IRS. This is a must read. Do you believe it? Yes, right here in America!  I don't want to believe it!! But it's true.


***Highlights of New IRS Authority***

• IRS agents verify if you have “acceptable” health care coverage
• IRS has the authority to fine you up to $2,250 or 2 percent of your income (whichever is greater) for failure to prove that you have purchased “minimum essential coverage”
• IRS can confiscate your tax refund 
• IRS audits are likely to increase  
• IRS will need up to $10 billion to administer the new health care program this decade
• IRS may need to hire as many as 16,500 additional auditors, agents and other employees to investigate and collect billions in new taxes from Americans
• Nearly half of all these new individual mandate taxes will be paid by Americans earning less than 300 percent of poverty ($66,150 for a family of four

Get a copy of the complete report here http://bit.ly/dqzbXL

"A wise and frugal government, which shall restrain men from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government, and this is necessary to close the circle of our felicity."
  Thomas Jefferson, First Inaugural Address.

Is your contractor really an employee? Beware! IRS Announces Extensive Employment Tax Audits;

QUICK SUMMARY: Over the past few months, the IRS has provided insights into some of the new, so called "initiatives"( I prefer the word "TARGETS) it will focus on during 2010 and beyond. In connection with these "initiatives", the IRS has been hiring and training many new agents. So, be sure you keep detailed and accurate records, report your employees as employees and not as independent contractors and be prepared to support any position you take on your employment tax returns.  


Care to see where you stand and what your exposure may be? The easiest thing to do is give us a call. But, if you'd like some "light" reading drop me an email at thomas@abbelamarco.com. I'll send you a copy of the IRS's own training manual for auditing this issue. But be warned - it's some nasty reading!

--------


As you can imagine, with the economy still reeling and tax collections dropping like a stone, the importance of the governments’ oversight of our system of taxes becomes ever more critical.
From both the federal and state levels we continue to read about new and improved compliance measures being put in place. Take one of the recent announcements at the end of 2009 from the IRS as an example.
The IRS has announced it will conduct intensive employment tax audits under its National Research Program (NRP) starting in 2010. This is a multi-year program with random audits scheduled to begin in February 2010. The IRS has said it will audit U.S. companies under this program. The NRP is a study and data collection project that helps the IRS update its noncompliance estimates and update its computer-based audit programs. “Normal” audits do not yield as valuable compliance data as random audits because the IRS, in normal audits, is intentionally targeting the taxpayers they believe have noncompliance problems. NRP audits on the other hand, are random to allow the IRS to statistically measure the total amount of noncompliance in a specific area. The IRS then uses this data to update its computers and estimates of the tax gap—the difference between total taxes owed and the amount actually paid by taxpayers.
The NRP audits are also much more intense and less targeted than a typical audit. The NRP audits allow the IRS to identify where the compliance problems lie in a specific population and to better target tax returns for audit in the future.
The goal of the employment tax audit program is to gather information in five categories:

1. Worker classification
2. Fringe benefits
3. Non-filers
4. Reimbursed expenses, and
5. Officer/owner compensation

Various government agencies have recommended that the NRP be implemented for employment taxes to study and access the impact of worker misclassification on the employment tax gap, which has become a high priority of the government.  And why shouldn’t it be. At stake with worker classification issues are tremendous potential uncollected taxes for Social Security, Medicare and income taxes since much of the miss-classification is what makes up the underground — and off the tax rolls — economy.
The administration has been quiet thus far on the issue of worker classification, but Obama was a supporter of reform efforts while in the Senate. If Congress enacts a health care reform bill with a “pay-or-play” provision for employers, it could put even more pressure on the worker classification rules.

Seven Things You Should Know About Checking the Status of Your Refund

Are you expecting a tax refund from the Internal Revenue Service this year? If so, here are seven things you should know about checking the status of your refund once you have filed your federal tax return.

1. Online Access to Refund Information Where’s My Refund? or ¿Dónde está mi reembolso? are interactive tools on IRS.gov and the fastest, easiest way to get information about your federal income tax refund. Whether you split your refund among several accounts, opted for direct deposit into one account, used part of your refund to buy U.S. savings bonds or asked the IRS to mail you a check, Where’s My Refund? and ¿Dónde está mi reembolso? give you online access to your refund information nearly 24 hours a day, 7 days a week. It’s quick, easy and secure.

2. When to Check Refund Status If you e-file, you can get refund information 72 hours after the IRS acknowledges receipt of your return. If you file a paper return, refund information will generally be available three to four weeks after mailing your return.

3. What You Need to Check Refund Status When checking the status of your refund, have your federal tax return handy. To get your personalized refund information you must enter:

* Your Social Security Number or Individual Taxpayer Identification Number
* Your filing status which will be Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)
* Exact whole dollar refund amount shown on your tax return

4. What the Online Tool Will Tell You Once you enter your personal information, you could get several responses, including:

* Acknowledgement that your return was received and is in processing.
* The mailing date or direct deposit date of your refund.
* Notice that the IRS could not deliver your refund due to an incorrect address. In this instance, you may be able to change or correct your address online using Where’s My Refund?.

5. Customized Information Where’s My Refund? also includes links to customized information based on your specific situation. The links guide you through the steps to resolve any issues affecting your refund. For example, if you do not get the refund within 28 days from the original IRS mailing date shown on Where’s My Refund?, you may be able to start a refund trace.

6. Visually Impaired Taxpayers Where’s My Refund? is also accessible to visually impaired taxpayers who use the Job Access with Speech screen reader used with a Braille display and is compatible with different JAWS modes.

7. Toll-free Number If you do not have internet access, you can check the status of your refund in English or Spanish by calling the IRS Refund Hotline at 800-829-1954 or the IRS TeleTax System at 800-829-4477. When calling, you must provide your or your spouse’s Social Security number, filing status and the exact whole dollar refund amount shown on your return.

Refund checks are normally sent out weekly on Fridays. If you check the status of your refund and are not given the date it will be issued, please wait until the next week before checking back."

10 Facts About Capital Gains

Have you heard of capital gains and losses? Here's what the IRS wants you to know.

1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.
2. When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.
3. You must report all capital gains.
4. You may deduct capital losses only on investment property, not on property held for personal use.
5. Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
6. If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent your net long-term capital gain is more than your net short-term capital loss, if any.
7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2009, the maximum capital gains rate for most people is15%. For lower-income individuals, the rate may be 0% on some or all of the net capital gain. Special types of net capital gain can be taxed at 25% or 28%.
8. If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.
9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.
10. Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13of Form 1040."

The Ultimate IRS "Gotcha"

Imagine a " Special Tax" on people who have "too many deductions". That's the Alternative Minimum Tax, (AMT). With one hand they giveth, and the other, they take it AWAY!

"Seven Facts to Help You Understand the Alternative Minimum Tax

The Alternative Minimum Tax attempts to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax.

Here are seven facts the Internal Revenue Service wants you to know about the AMT and changes to this special tax for 2009.

1. Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. Congress created the AMT in 1969, targeting taxpayers who could claim so many deductions they owed little or no income tax.

2. Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.

3. You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.

4. The AMT exemption amounts are set by law for each filing status.

5. For tax year 2009, Congress raised the AMT exemption amounts to the following levels:

* $70,950 for a married couple filing a joint return and qualifying widows and widowers;
* $46,700 for singles and heads of household;
* $35,475 for a married person filing separately.

6. The minimum AMT exemption amount for a child whose unearned income is taxed at the parents' tax rate has increased to $6,700 for 2009.

7. If you claim a regular tax deduction on your 2009 tax return for any state or local sales or excise tax on the purchase of a new motor vehicle, that tax is also allowed as a deduction for the AMT."

New York No Longer Sending Out Form 1099-G

The state of New York is no longer mailing out Form 1099-G to report how much of a state income tax refund a person received. Not mailing out this document will save the state 'approximately $700,000,' according to an email notification sent by the Department of Taxation and Finance.

Form 1099-G reports how much of a refund a person received last year from their state government. State income tax refunds are usually taxable income for people who itemized their deductions in the previous year. Taxpayers and accountants alike often rely on these 1099-G forms.

New York does provide the ability for taxpayers to view their 1099-G information online or to call a toll-free hotline at (866) 698-2946. Taxpayers calling from outside the state of NY will need to use the non-toll-free number of (518) 485-0799.

http://www.tax.state.ny.us/pit/1099g.htm

Eight Facts about the New Vehicle Sales and Excise Tax Deduction

If you bought a new vehicle in 2009, you may be entitled to a special tax deduction for the sales and excise taxes on your purchase.
Here are eight important facts the Internal Revenue Service wants you to know about this deduction:

1. State and local sales and excise taxes paid on up to $49,500 of the purchase price of each qualifying vehicle are deductible.
2. Qualified motor vehicles generally include new cars, light trucks, motor homes and motorcycles.
3. To qualify for the deduction, the new cars, light trucks and motorcycles must weigh 8,500 pounds or less. New motor homes are not subject to the weight limit.
4. Purchases must occur after Feb. 16, 2009, and before Jan. 1, 2010.
5. Purchases made in states without a sales tax — such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon — may also qualify for the deduction. Taxpayers in these states may be entitled to deduct other qualifying fees or taxes imposed by the state or local government. The fees or taxes that qualify must be assessed on the purchase of the vehicle and must be based on the vehicle’s sales price or as a per unit fee.
6. This deduction can be taken regardless of whether the buyers itemize their deductions or choose the standard deduction. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax return.
7. The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.
8. Taxpayers who do not itemize must complete Schedule L, Standard Deduction for Certain Filers to claim the deduction.

February 10 Filing Due Dates

"Employers - Federal unemployment tax. File Form 940 for 2009. This due date applies only if you deposited the tax for the year in full and on time.

Employers - Social security, Medicare, and withheld income tax. File Form 941 for the fourth quarter of 2009. This due date applies only if you deposited the tax for the quarter in full and on time.

Small Employers - File Form 944 to report social security and Medicare taxes and withheld income tax for 2009. This due date applies only if you deposited the tax for the year in full and on time.

Farm Employers - File Form 943 to report social security and Medicare taxes and withheld income tax for 2009. This due date applies only if you deposited the tax for the year in full and on time.

Certain Small Employers - File Form 944 to report social security and Medicare taxes and withheld income tax for 2009. This tax due date applies only if you deposited the tax for the year in full and on time.

Employers - Nonpayroll taxes. File Form 945 to report income tax withheld for 2009 on all nonpayroll items. This due date applies only if you deposited the tax for the year in full and on time.

Employees - who work for tips. If you received $20 or more in tips during January, report them to your employer. You can use Form 4070."

Ten Cannots

Ten Cannots
by the Rev. William J. H. Boetcker
Presbyterian Clergyman in 1916

1. You cannot bring about prosperity by discouraging thrift.
2. You cannot help small men by tearing down big men.
3. You cannot strengthen the weak by weakening the strong.
4. You cannot lift the wage earner by pulling down the wage payer.
5. You cannot help the poor man by destroying the rich.
6. You cannot keep out of trouble by spending more than your income.
7. You cannot further the brotherhood of man by inciting class hatred.
8. You cannot establish security on borrowed money.
9. You cannot build character and courage by taking away man's initiative and independence.
10. You cannot help men permanently by doing for them what they could and should do for themselves.

Feb 2 2010 Tax Due Dates

Furnish Forms 1098, 1099 and W-2G to recipients for certain payments made during 2009, and Form W-2 to employees who worked for you during 2009. Deposit FUTA tax owed through Dec if $500 or less. File 2009 Form 940, Form 941, Form 943, or Form 944 if you did not deposit all taxes when due. Certain small employers: File Form 720 for the 4th quarter of 2009. File Form 730 and pay the tax on wagers accepted during Dec 2009. File Form 2290 and pay the tax on vehicles first used in Dec 2009."

LLC, LLP and General Partnerships Annual Filing Fee

LLC, LLP and General Partnerships Annual Filing Fee

If you are a single or multi member LLC, LLP or General Partnership (new for 2010) you need to pay an annual filing fee to New York State by January 30, 2010. The fee is based on 2008 income (this is not a typo). NYS is mandating this form should be filed electronically and the fee paid electronically with the state. As Certified Public Accountants in New York we are required to file this electronically by NYS mandate.

Tax Tip: How to Obtain a Transcript of Your Past Tax Information

"How to Obtain a Transcript of Your Past Tax Information

Taxpayers who need their past tax return information can obtain it from the IRS. Here are nine things to know if you need copies of your federal tax return information.

1. There are two easy and convenient options for obtaining free copies of your federal tax return information — tax return transcripts and tax account transcripts.

2. The IRS does not charge a fee for transcripts, which are available for the current year as well as the past three years.

3. A tax return transcript shows most line items from your tax return as it was originally filed, including any accompanying forms and schedules. It does not reflect any changes you, your representative or the IRS made after the return was filed. In many cases, a return transcript will meet the requirements of lending institutions, such as those offering mortgages and student loans.

4. A tax account transcript shows any later adjustments either you or the IRS made after the tax return was filed. This transcript shows basic data – including marital status, type of return filed, adjusted gross income and taxable income.

5. To request either transcript by phone, call 800-829-1040 and follow the prompts in the recorded message.

6. To request a tax return transcript through the mail, individual taxpayers should complete IRS Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. Form 4506T-EZ is only for individuals who filed a Form 1040 series return. Businesses, partnerships and individuals who need transcript information from other forms or need a tax account transcript must use the Form 4506T, Request for Transcript of Tax Return.

7. You should receive your tax return transcript within 10 working days from the time the IRS receives your request. Allow 30 calendar days for delivery of a tax account transcript.

8. If you still need an actual copy of a previously processed tax return, it will cost $57 per tax year and take much longer. Complete Form 4506, Request for Copy of Tax Form, and mail it to the IRS address listed on the form for your area. Please allow 60 days for actual copies of your return. Copies are generally available for the current year as well as the past six years.

9. Visit the IRS Web site, IRS.gov, to determine which form will meet your needs. Forms 4506, 4506T and 4506T-EZ can be found at IRS.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

Links:


Form 4506-T, Request for Transcript of Tax Return (PDF 45.3K)
*
Form 4506, Request for Copy of Tax Form (PDF 42.3K)"

The biggest IRS headaches that plagued taxpayers in 2009 Printer friendly Order reprints of this content Posted by AccountingWEB in Tax, Income Tax on

The biggest IRS headaches that plagued taxpayers in 2009

Printer friendly
Order reprints of this content

Posted by AccountingWEB in Tax, Income Tax on 01/14/2010 - 00:26

Every year the National Taxpayer Advocate -– Nina E. Olson -- submits a report to Congress which takes a critical look at the IRS. It’s her job to identify at least the 20 most serious issues taxpayers face in dealing with the tax agency, and to recommend solutions. After an in-depth look, Olson says that overall, the IRS had a successful year, but there are big problems. This year Olson pinpointed 21 problems, updates on two previous issues, and recommended dozens of administrative and legislative changes. Superimposed over this long list of problems is her concern about the IRS as a whole. As the House and Senate work to reconcile their version of the health reform bill, Congress is poised to add significant new areas of responsibility to the IRS. This comes at a time when the tax agency is already beleaguered by budget cuts, staffing shortages, an outdated computer system, and, based on this year’s list, an inability to meet current obligations with a high degree of effectiveness.

Here are some of the highlights of Olson’s report:

Telephone Assistance for Taxpayers

Problem: The IRS has a declining ability to answer taxpayer phone calls on the toll-free lines, even as demand for assistance is rising. For 2010, the agency’s goal is to answer 71 percent of calls. Olson points out that this means three out of ten callers will not get the help they need. “This level of service is unacceptable,” she says. In 2007 the answer rate was 83 percent.

Recommendation: The report advises the IRS to staff its toll free lines sufficiently to raise the answer rate to 85 percent. The report also advises the IRS to create a dedicated phone line manned by those trained to deal with national disasters, late year, or one-time tax law changes.

Examinations and Collections

Problem: There is no “overarching strategy” governing the process of examinations and collections, according to the report. The policies have, instead, been hammered together piecemeal. Olson is concerned that the way the IRS seeks to collect unpaid tax liabilities causes harm to taxpayers, damaging them financially and impairing their ability to get credit, while not raising tax revenue. She speculates that the harshness of the IRS collection process may drive many taxpayers into “long-term noncompliance.”

Of particular concern is lien filing, which the report cites as the second most serious problem facing taxpayers. Liens are filed through an automated system, even in some cases where there is no property to encumber. Over the last decade, the IRS has increased lien filings by nearly 475 percent, yet, adjusted-for-inflation, revenue from collections fell by 7.4 percent over the same period.

Recommendation: The NTA report recommends that Congress instruct the IRS to change the method of lien filing and take the “automatic” element out. That is, before a lien is filed, to assess whether the benefits of the lien outweigh the harm to the taxpayer and whether the lien will jeopardize the taxpayer’s ability to pay future taxes. Another related study shows that the IRS fails to consider a taxpayer’s other debts, such as credit cards, school loans, and medical bills. “Any taxpayer with these debts will tell you that these creditors don’t go away,” Olson said. “Taxpayers are placed in the intolerable position of agreeing to pay the IRS more than they can actually afford (given their other debts) and then defaulting on the IRS payment arrangements when they channel payments to unsecured creditors in order to get some peace.”