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The Government Shutdown Could Cause You Tax Problems

For over a week now, the federal government has been partially shut down - what some news outlets have called a slim down - thanks to Congress' inability to come together on any sort of agreement that would have prevented, or at least delayed the issue at hand.

For some, the government shutdown has been little more than an afterthought and fodder for the talking heads on TV. For many, however, the government shutdown couldn't have come at a more inconvenient time and could lead to problems. That's because the October 15, 2013 extended due date for tax returns is now less than a week away and one government agency that has been significantly impacted by the shutdown is the Internal Revenue Service. In case, you didn't know it, IRS is actually an arm of the U.S. Treasury Department and, thanks to the shutdown, has less than 10% of its staff reporting for work.

Although you wouldn't be alone if the first thought to go through your mind was, "Awesome, no one's there to collect my tax!" you might want to temper your enthusiasm. In fact, the IRS' forced scale back means you still have all the responsibilities of filing your return (if you have not done so already), without much of the help. Here's why...

The government shutdown has no impact on when you must file your tax return. If you filed a timely extension earlier this year and have until the October 15th extended deadline to file your 2012 tax return, you must still file it by that deadline in order to avoid possible penalties. And even though the IRS will be operating with a skeleton crew of sorts, they will still cash your check promptly, if you owe any taxes. On the flip side though, if you've overpaid your taxes and, after filing your return, you're entitled to a refund, that refund could very well be delayed. How long? That's a good question without a definite answer, but needless to say, the longer this shutdown drags on, the longer it may take to get your refund.

Need help filing that return? That might be a lot more problematic too. If you call an IRS hotline with a question on a "normal" day, it can be challenging to get a timely answer, if you can even get an answer at all. But now? Simply put, impossible. In response to having its workforce slashed by over 90%, IRS has closed its hotlines. Walk-in assistance centers are also closed.

In addition to your refund being delayed, if you happen to be waiting for IRS to respond to a private letter ruling (PLR) request, be prepared to continue to do so. Worse yet, if you're waiting on IRS to respond to a PLR related to a retirement account issue, you can probably all but forget about getting a response until IRS is able to expand its workforce again. Out of the nearly 9,000 IRS workers still reporting for duty, only about 20 work in the Tax Exempt and Government Entities Division, which, despite its unrelated name, is actually the division of IRS primarily responsible for issuing rulings related to retirement accounts. Here is the Internal Revenue Service's full 2014 government shutdown contingency plan.

As if that's not enough of a kick in the pants, here's the "best" part of the whole situation. Although Congress can't agree on much, they already decided that when they finally come to an agreement - whenever that might be - they will incorporate retroactive pay for furloughed government workers into that agreement. Think about that for a second. That means that, at the end of the day, the IRS professionals who could be answering your questions by phone, timely processing your refund or performing other tasks to assist you will,
instead of doing those jobs, be paid to sit at home on the couch and watch TV. Nice. But don't blame the IRS or its workforce for this one. This is a mess that was created by, is being perpetuated by, and will eventually be resolved by Congress.

If you're wondering if there's any good news - anything at all - to come from the IRS' bare bones workforce... yes, there is. IRS has announced that during the shutdown, audits will be suspended. This may be of some benefit for a few individuals, but if you file your tax returns on time, accurately and completely, the chance of being audited is minimal anyway.

The government shutdown is, of course, a fluid situation and it’s possible that at some point, even without an agreement in Congress, IRS could find ways to expand its workforce, or be forced to reduce it further. Stay tuned to the Slott Report for any major changes.

- By Jeffrey Levine and Jared Trexler


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Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

You recently said that a 401(k) distribution would add to your MAGI (modified adjusted gross income) for the purpose of determining if you are subject to the 3.8% healthcare surtax. What about Roth IRA distributions? Would they also count towards your total MAGI income for surtax purposes?


IRA distributions are exempt from the 3.8% surtax, but taxable distributions from IRAs can push income over the threshold amount, causing other investment income to be subject to the surtax. Because Roth IRA distributions are generally tax-free, they don’t count towards your total MAGI.