The American Jobs Plan–What Is It & How Will They Pay For It?

roadwork being done on a US Interstate

In a previous article, we discussed the Child Tax Credit and the major enhancements to that credit through the American Rescue Plan. This plan not only provided funding for this credit it also laid out the spending of all together $1.9 Trillion towards the recovery of America. 

Today I am going to discuss the next part of the “Build Back Better Agenda”.  I will start by laying out the provisions of this next step “The American Jobs Plan”.  Going through all of this you will see that this next package like the first is a plan for major spending. So, I will go into detail as to how they plan to pay for it by beefing up the IRS and their collections and audit process.

What is The American Jobs Plan?

The American Jobs Plan is focused on upgrading and repairing America’s physical infrastructure, investing in manufacturing, research and development, and expanding long term-health care services. The proposal calls for over $2 trillion to rebuild the nation’s crumbling infrastructure including roads bridges and airports, as well as spending on care infrastructure with a focus on long-term care for the elderly and disabled. $1 Trillion of this plan will be spent on families and education while also providing $800 billion in tax cuts to promote economic prosperity and security. This new proposal is designed to promote longer-term economic recovery and keep the United States competitive while responding to the economic devastation from the coronavirus pandemic and the climate crisis.

CBSNEWS.com has nicely laid out a breakdown of the spending proposed through the American Families Plan:

  • $200 billion for universal pre-K for all 3- and 4-year-olds
  • $225 billion for childcare including subsidies for low-and middle-income families and money for providers and workers
  • More than $100 billion for two years of free community college for all
  • $225 billion for a national paid family and medical leave program
  • Extends the expanded Child Tax Credit, which means families will receive monthly checks totaling $3,600 for children under six and $3,000 for kids ages six through 17 through 2025
  • Makes the increased Child and Dependent Care Tax Credit as well as the Earned Income Tax Credit permanent
  • Make recently expanded premium subsidies under the Affordable Care Act permanent
  • Also includes scholarships for teachers, increased Pell Grants, expanded nutrition programs.

Where Will the Money Come From?

With all this spending the major question is how it all is going to be paid for. We already have a growing deficit problem. Along with the proposal, there is a proposal for some major tax changes. They are promising not to have any tax increases on people making less than $400,000. They are proposing rolling back the drop in the top tax bracket from Donald Trump’s 2017 Tax Cuts. This would put the highest tax bracket back to 39.6% from 37%. It is also calling for Capital Gains to be taxed as regular income paying the same 39.6% tax rate up from the 20% paid now. It will also close common loopholes used to avoid paying taxes on different types of gains. 

The proposal is also calling for corporate tax increases to help pay for the plan. In the plan, the corporate tax rate would rise from 21% to 28%. The president also proposed expanding payroll taxes for high earners to help shore up the finances of the Social Security program and eliminating the “step-up” in basis on assets in an estate- a tax loophole that means unrealized capital gains held at death are never taxed.

 

How the IRS Is Involved

The president’s proposal is also calling for a major investment in the IRS that should produce major returns by increasing their ability to collect. Over the past 25 years, there has been a major decrease in funding allocated to the IRS for audits, exams, and collections. In the past 10 years, it has declined by almost 30%. The IRS has lost 17,436 positions working in enforcement and collections in the last 10 years. 

Consequently, between 2010 & 2018 the amount of individual tax examinations has decreased by 46% and examinations in corporate income tax returns has dropped by 37%. This has resulted in what they call a tax gap. This is the difference between what taxpayers owe and what they pay on time. 

According to IRS figures as an example, the tax gap for 2011-2013 was approximately $381 billion. As cited in an article on quart.com by Charles Rettig because of new sources of income like cryptocurrency the tax gap is growing year by year. “It would not be outlandish that the actual tax gap could approach and possibly exceed, $1 trillion a year,” Ruttig said.

Collecting a portion of this missed income could pay for a large part of the proposed plan. The president is calling for an $80 Billion investment into the IRS and thinks this can provide a return of $700 billion more collected over the next 10 years. In the recent “skinny budget” the White House requested $13.2 Billion a 10.4% increase to allow oversight of wealthy and corporate tax returns. It also already requested an additional $417 million for tax enforcement.

This is just a start. Over the next decade, the proposal would provide steady funding for the IRS after years of declining budgets which have forced steep cuts in employees conducting audits, examinations, and collecting money. It will also provide security over time so it makes sense to train these employees to ramp up collection effort and conduct more audits and examinations without the fear that future lawmakers will pull away from the funding. This allocation of $80 Billion should all the IRS to increase productivity in these departments by about 15% a year.

 

Possible Upcoming Changes to How Income is Reported

Another major change within the IRS would also change in how income is being reported. A significant problem at this point is tax evasion and the underreporting of income. Studies show that more than 20% of the income of the top 1% goes unreported. People and businesses avoid reporting income in many ways. Some by accepting cash, use of cryptocurrency, and offshore accounts.  

One major step proposed to curb some of this underreporting of income would be requiring financial institutions to report more than just taxpayers’ interest earned, capital gains, and losses. Banks and other financial institutions would be required to report money coming in and going out of your accounts.  This would give IRS information on all your accounts whether you earned income from that account or not. This would obviously require a large effort from the financial institutions, but it would eliminate a huge blind spot that the IRS is currently dealing with.

Right now, a lot of self-employed individuals are on the honor system, unlike W-2 earners whose employers report their income to the IRS. The lack of information that the IRS has now makes it easy for self-employed individuals to lie about gross receipts and gross revenue to the business. Self-employed taxpayers who take outlandish write-offs and expense deductions are likely to be caught in an audit but the underreporting of income is much more difficult to track. Allowing the IRS to see how much was deposited and how much was withdrawn would help regulate the income being reported.  

With these major changes possibly coming to the IRS and their enforced collections and will be so important that you hire the correct tax professional. There is a provision in the plan that would give the IRS more rights to regulate paid tax preparers. There are certain types of tax preparers that are unregulated cannot really provide accurate tax assistance. These tax preparers make costly mistakes that subject their clients to costly audits and sometimes even intentionally defrauding taxpayers for their benefit. The president’s plan calls for giving the IRS the legal authority to implement safeguards in the tax preparation industry. It would also provide stiffer penalties for unscrupulous preparers who fail to identify themselves on tax returns and defraud taxpayers. 

With all this said it is so important for taxpayers to know who they are hiring. There are two levels of licensing that one can hire to ensure they have the correct representation. They are the Enrolled Agent and the CPA (Certified Public Accountant)

In conclusion, the President feels his new proposal is designed to promote longer-term economic recovery and keep the United States competitive while responding to the devastation from the coronavirus pandemic and the climate crisis. The plan would not only provide many much-needed services and rebuild a depleted and aging infrastructure, but it would also provide much-needed jobs.  With these adjustments in tax law and ramping up of the IRS and their collection efforts, this plan could pay for itself. Of course, the next step is trying to get something like this approved. Republicans are already putting up major roadblocks on the possibility of them voting for any tax hikes whatsoever to fund this plan. They are also looking at a much lower dollar figure closer to the range of $600 Billion to $800 billion more focused on just infrastructure. 

With a thin margin between republicans and democrats, the president would have every democrat on board for them to steamroll this plan through Congress as they did with the previous stimulus plan.

 

IRS Collection FAQs

the IRS seal

What can the IRS do if you owe them money?

According to the IRS, their job is to find ways to recuperate their money. In doing so, they may seize (levy) your assets, such as retirement income, social security benefits, bank accounts, and wages. They may even seize your real estate, boat, car, and any other property you may have and sell it to satisfy the debt.

The first way to collect their money comes from garnishments. For example, if you are self-employed and 1099’d, they can take 100% out of your paycheck. W-2’d individuals, on the other hand, are in a slightly better position, especially those married with kids. The IRS can take most, but not all, depending on their filing status.

Aside from that, the IRS can garnish income through a business’ merchant account, such as PayPal, Stripe, and Square. In this case, they can take it all (100%). As for self-employed with personal tax debt, the IRS will send a garnishment letter to the business to garnish the owner’s wages. So, although they cannot take money from the business, they have figured out a way to get their owed money back since almost nobody chooses to garnish themselves.

That aside, if you have any state income tax refunds or future federal tax refunds, the IRS may seize them and then apply them to your federal tax liability.

Can the IRS put you in jail?

Generally, no. There is no such thing as a debtor’s prison, although an unfiled tax return is punishable by 12 months in jail, at least on paper. The IRS chooses not to pursue criminal tax evasion cases for many individuals annually. However, those that are caught are called to pay harsh penalties. These cases have to do with criminal intent, such as blatant tax evasion, and start with an audit of the filed tax return.

If the IRS identifies a pattern of willful evasion (i.e., large error sums occurring for several years), they have a strong indication that the taxpayer has willingly and knowingly committed serious tax evasion. This, consequently brings them under criminal investigation. The same applies to unreported income (i.e., from a side hustle) and dodgy behavior during an audit (i.e., purposely hide bank accounts or other records).

So, even though the IRS itself cannot put you behind bars, the court can if the IRS initiates a criminal investigation and you are found guilty. Although this is rarely the case (very few taxpayers face criminal charges for tax fraud annually), it still is a possible scenario.

Can the IRS levy your bank account?

Yes. An IRS levy gives the service the right to seize your property to satisfy a tax debt. Besides garnishing your wage and seizing your personal property, they can also take money from a financial account, such as a bank account. To do this, they first freeze the account for 21 days. Whatever money you have in that account is turned over to the IRS at the end of the 21-day period. This is an automated process done by the bank. Note that the IRS can levy any bank account in which your name appears, whether you are the sole owner or co-owner.

This is a serious situation that can put the taxpayer in a very tough spot. Nevertheless, Innovative Tax Relief knows how to fix it if you act fast. Although it is a difficult task, there is a good chance that you can get the account funds unfrozen and the levy lifted if we have enough time in the 21-day window. Our expertise can help achieve this outcome and make the IRS change course.

Can the IRS place a lien on your property?

Yes. The IRS can place a lien on your property, which means that you will have to pay the due amount when you sell it. It should be noted that the IRA cannot force a foreclosure on your primary home. But they can take your second home or an investment property and force a sale. Generally speaking, they do it when the tax debt is over $25k.

This is because a lien is a legal claim against your property to satisfy a tax debt as opposed to a levy which is a legal seizure of your property for the same reasons. In other words, a levy allows the IRS to take your property while a lien does not.

If you get a lien, though, all creditors are alert that the government has a legal right to your property as the IRS files the Notice of Federal Tax Lien, a public document that informs creditors that there is a secure claim against your assets. This can affect your credit report as credit reporting agencies can find the Notice and include it in your credit report. A levy is nothing like that as it is not a public record.

Can the IRS seize your business property?

In short, yes. The IRS can seize your business property to get paid the amount you owe them. They cannot seize business assets tied to no net recovery for the IRS. This means that they can get their hands only on business property that has equity. In doing so, they start the collection process by sending you a Notice and Demand for Payment letter.

At this time, you may be offered installment payment plans to repay your due taxes, depending on your financial circumstances. Or, you could file an Offer in Compromise, which will allow the IRS to consider the tax bill as fully repaid by making a partial tax payment. If you refuse to pay your taxes or don’t respond to the letter, the IRS sends a Notice of Federal Tax Lien, which enables them to claim your business property (both present and future).

The Notice of Levy is the final step before your business property is seized for back taxes. Usually, you have 30 days before they actually seize your business assets. During this time, you can make some efforts to stop the levy (i.e., set up an installment payment plan, discuss your case with an IRS manager, etc.).

If you reach no resolution within the 30-day window, the IRS will seize your business property, including rental income and accounts receivables, and force a sheriff’s sale of the business property and business items.

Also, if you operate as a sole proprietorship (have personal liability for the owed business taxes), the IRS may even garnish your Social Security benefits, retirement payments, and wages to pay the tax bill.

Innovative Tax Relief can help you stop the seizure by trying to appeal the levy., which is a time-consuming process and often overwhelming for business owners.

Can the IRS repo your vehicle?

The IRS has the legal right to take your vehicle’s title, right, and interest. This means that they can seize a vehicle you own. However, this is an option that is left as a last resort. The IRS will only consider seizing your car or another vehicle if there is equity in it.

For instance, if you have purchased a $15,000 car and are making payments on it and still owe $12,000, it will be highly unlikely for the IRS to take it. If you have paid off a $25,000 vehicle, though, they will seize it. This is because there should be equity so the IRS can keep it (the equity) after they auction off the vehicle and repay the lien holder. If there is no equity, they are not interested in seizing your car.

In general, the IRS will not pursue repossessing your vehicle unless there is around 20% equity they can get from the sale of your vehicle. And, this is after they take out 20% of your asset of the fair market price. So, a $30,000 vehicle they seize is actually worth $24,000.

Aside from that, the Congress passed the Taxpayer Bill of Rights in 1988, which gives taxpayers more rights concerning what the IRS can seize. The same bill also limits the IRS’ actions in regards to the process in which they can seize it. In other words, the IRS won’t just show up one day at your business or home and seize your vehicle. They are obliged to give you a 30-day notice of the intent. Plus, you have the legal right to be represented by a CPA or attorney and appeal an IRS decision.

All in all, the IRS does not favor repossessions of taxpayers’ assets, like their vehicle. They will, instead, want to work out any issues related to back taxes as they usually understand that seizing your vehicle can severely affect your day-to-day life. There is also a code that does not allow the IRS to put an additional economic burden on you (or cause one).

However, the IRS CAN seize and sell your second and third vehicles. If you find yourself in such a situation, please contact Innovative Tax Relief to assist you in keeping your vehicle and settling with the IRS.