According to figures for tax receipts for the nine months ended June 30, 2022, the Internal Revenue Service (IRS) was projected to take in $5 trillion for fiscal year 2022, ending September 30th.[1] Last year’s figure was $4 trillion. For the period through June 30, 2022, individual income tax receipts made up 56% of the amount taken in and social security and retirement receipts made up 29 percent. The other 15% is made up of corporate income taxes, excise taxes, and custom duties, with estate and gift taxes making up just .6% of the total. The year-over-year increase in receipts would lead one to believe that the federal government has a spending problem, not a revenue problem. National defense is just 13% of spending. Social Security, income security, health and Medicare make up 65% of expenditures.
Excessive Penalties Spotlighted
The recently passed Inflation Reduction Act of 2022 allocated $80 billion to the IRS for enforcement and improved service. A recent article about our tax code pointed out that the “code is riddled with excessive penalties for what are often honest mistakes.”[2] The article suggests that the US Supreme Court could decide to hear one or all three of the cases before it referring to the Eighth Amendment prohibition against excessive fines by the federal and state governments. As practitioners we are geared to meeting deadlines, but taxpayers continue to arrive at a professional’s office with problems that shock them and us.
For example, new work relationships for non-office-bound employees are highlighting disagreements among the various states over nexus. Penalties and interest for underpaying estimated taxes due quarterly, not annually, will be a taxpayer surprise. The IRS has partially recognized the problem through a recent program to waive penalties and interest for taxpayers who wish to become compliant. There is probably better success when appealing under the federal program than the states’ programs and laws, from our experience.
A Tip on TIPS
Although it is an investment product, we’ve looked at the US Treasury’s Inflation-Protected Securities (TIPS) as a purchasing power of the dollar guardrail. In an inflationary environment, such as we’re in now, why would TIPS be decreasing in value almost in line with regular Treasury bonds (13.3% decline versus 13.5% decline over 2022, respectively)? Because the semiannual interest payments on TIPS and the ultimate amount returned at maturity both adjust to changes in the Consumer Price Index, the inflation protection should work, if “held to maturity.”[3] However, TIPS are bought and sold daily. The market value of TIPS, not held to maturity, varies daily, similar to other bonds.
If you or any other advisors have questions about the issues raised here, please contact your investment manager or one of us.
William H. Darling, CPA – Chairman & CEO
Jeanne M. FitzGerald, CPA – Tax Manager