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Get ready for a swarm of incompetent IRS agents in 2023

The IRS is hiring 87,000 agents, thanks to President Joe Biden’s 2021 infrastructure package, but they won’t be fully trained for three years.

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The IRS is hiring 87,000 agents, thanks to President Joe Biden’s 2021 infrastructure package, but they won’t be fully trained for three years.

The Internal Revenue Service is hiring 87,000 new agents, but taxpayers will not feel the pain for another two to three years. That’s how long it will take the agency to hire and train agents. Few have discussed the extent of this pain. Still, it’s something to think about when you consider the majority of coming audits will be conducted by new agents, many of whom will have been hastily hired and operating with minimal supervision.

Playing the audit lottery will not be smart in future tax years. Taxpayers should protect themselves now, especially when profiting from statutory gray areas — such as cryptocurrency staking, investing through decentralized autonomous organizations (DAOs) and other decentralized finance (DeFi) products.

When I started my career in the mid-2000s, business audits were standard, and the new agents were always the worst with which to deal. You had to explain everything in detail to them like little children, and they still would write up non-factual summaries or incorrect legal opinions. That required escalating cases for a manager to review or file an appeal. New agents were also often uber-aggressive, fighting over small changes to build a reputation for always having major tax increases in the audits they took on.

Don’t get me wrong. The IRS needs to hire agents. The situation for the last few years has been nothing short of a nightmare. Good luck reaching an agent to resolve a tax issue! In 2021, the IRS received 282 million telephone calls. Customer service representatives only answered 32 million, or 11 percent, of those calls. The IRS certainly needs to hire more staff to answer phones and resolve issues within a reasonable time.

Related: Biden is hiring 87,000 new IRS agents — and they’re coming for you

The trouble at the IRS dates back to 2011, when major budgetary cuts led to a hiring freeze across the board. The total number of workers at the IRS has fallen massively, from 94,711 agents in 2010 to 78,661 full-time equivalent employees in 2021. This means that adding 87,000 revenue agents will more than double the size of the current IRS!

Add to this the roughly 20,000 agents eligible to retire at the IRS right now, and the IRS will need to hire more than 107,000 agents in the next few years. Thus, two out of three IRS employees will be total newbies in three years. In a perfect world, this could lead to a startup-like culture at the IRS, with innovations and a culture of making a difference. Yeah, right. This is the government. They won’t run things efficiently. And these agents who are tracked on their performance will go for the low-hanging fruit with taxpayers they can bully into big changes on examination, meaning a big increase in small business and individual audits.

Sources of federal tax revenue in billions, 2000-2021. Source: Cato Institute

However, we won’t see much of an increase in audits for a couple of years. It will take a while for the IRS to find enough hires though to fill all those seats. The hiring freeze was lifted in 2019, but because of the pandemic, actual net hiring has not yet occurred. In 2021, the IRS lost 14,500 employees due to retirement or separation but gained only 12,500 external hires.

This failure in hiring wasn’t from a lack of trying. In 2021, I was inundated with Facebook ads and recruiter messages, but they still couldn’t even hire enough agents to fill the seats of those who were retiring. So one certainly has to ask, how will they find over 100,000 new agents? And will their hiring standards drop substantially to get enough warm bodies in chairs?

Then it will take even more time before we see these agents in the field. Once a revenue agent is hired, there is another one to two years of training before they are unleashed on the public.

The most likely agent you will meet, a “Small Business/Self-Employed Revenue Agent in Field Examination,” requires 1,888 hours of training. At 40 hours per week, this amounts to 47.2 weeks, which is almost a year after vacation and personal time. A “Special Agent for Criminal Investigations” requires 3,904 hours of training, or closer to two years, to get up to speed. Even a “Customer Service Representative” needs 1,500 hours of training, or more than nine months — to answer the phone lines!

While the IRS has been dwindling in size and struggling to replace retiring agents, the tax laws and technology-based financial transactions have become increasingly complex. The Tax Cuts and Jobs Act (TCJA) in 2017 was the first major overhaul of the tax system since the Tax Reform Act of 1986. Five years after passing the TCJA, not all the provisions have been implemented yet. Who knows what strange memos might start coming out in these not-yet-interpreted areas? Then there are all the gray areas created by different types of cryptocurrency transactions, staking, DAOs and DeFi, with many unique fact patterns for which the relevant laws have yet to be interpreted by the tax courts.

The antiquated IRS computer system further adds to the challenges faced. The IRS still runs on a mainframe computer system from the 1960s that is coded in Cobol. Few current programmers know Cobol, and the IRS has struggled to modify its systems. During the pandemic, a revenue agent admitted to me on a call that the IRS did not have the code to pause the system that mails out automated delinquency notices to taxpayers.

For the last 20 years, the U.S. Treasury has been spending billions a year to develop a new tax computer system, but there never seems to be a clear timeline of when this system will be released. It always seems about five years out with the ever-floating deadline. Because of this lack of decent computer systems, a lot of tasks at the IRS are still performed manually. The IRS has about 60 case management systems that are not interconnected; each function’s employees must transcribe or import information from other electronic systems and mail or fax it to other departments.

Related: Tips to claim tax losses with the US Internal Revenue Service

Despite all these challenges, the IRS is already signaling that they intend to start doing substantial business audits in future years. It has been years since the Coinbase John Doe summons, and the IRS still has not done the expected bulk audits, so with staffing increases, these will probably start increasing.

Since the pandemic, transfer pricing audits have ground to a halt but will surely pick up again soon — and I expect many crypto businesses to be the target of these audits as well, especially those in DeFi with cross-border lending transactions. And then for R&D, the IRS has issued two memos in the last year requiring full due diligence and documentation to be done before preparing the tax return, but the R&D credit mills predatorily targeting startups have yet to change their business practices, so I expect to see audits of R&D credits en masse once enough agents are ready.

Most of the tax accountants I worked with early in my career have long since retired. The new generation of so-called “experts” didn’t get this business audit experience in their early careers and are utterly unprepared for what is on the horizon at the IRS. Because of this, there is a lot of incorrect information floating around in the tax world. Many advisors who have been playing the audit lottery for years successfully are in line to get both themselves and their clients burned in the coming audit storm.

When should taxpayers be afraid? Considering the two- to three-year timeline to get staffed and the three-year statute of limitations for auditing most tax returns, the tax years that will be most at risk for audit are 2021 and onwards. Per 2019 IRS statistics, individuals with taxable income between $25,000 and $500,000 only have a roughly 0.2% chance of being audited each year, with those reporting $0 income or a net loss for the year at 1.1%.

Audit Rates by Taxable Income Bracket in 2019. Source: Government Accountability Office

Back in 2010, mid-range incomes were only at a 0.7% risk. If $0 or less of income was reported, there was a 20.6% chance of an audit — meaning those playing it conservatively will likely still be OK. However, those taking aggressive positions were at far greater risk, likely running that 1-in-5 risk of audit.

Because of this, I recommend choosing your advisors carefully. Aggressive tax positions should be avoided right now unless the benefit outweighs the risk regarding the cost of litigation. The biggest fallacies I hear in consult calls every week tend to come from Reddit threads, and trust me, Reddit is not a credible source. Be sure to look up your advisors and make sure they are licensed and experienced, as this, at least, will give some grounds to have penalties waived if an aggressive tax position is questioned.

Crystal Stranger is a federally-licensed tax EA and the chief operating officer at GBS Tax. She worked previously as a software developer in San Francisco.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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Next Bitcoin bull run to be half story, half utility — Mike Novogratz at Token2049

The next Bitcoin rally will require fast and scalable systems, which the community has yet to build, says Galaxy Digital CEO Mike Novogratz.

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The next Bitcoin rally will require fast and scalable systems, which the community has yet to build, says Galaxy Digital CEO Mike Novogratz.

The next Bitcoin (BTC) bull run will have to be much different from historical cryptocurrency rallies in terms of story and utility, Galaxy Digital CEO Mike Novogratz believes.

Compared with previous bull runs, the next Bitcoin rally will have to be more focused on utility and less on the story, Novogratz predicted during a panel at the Token2049 crypto event on Sept. 28.

The Bitcoin bull run of 2017, one of the biggest historical rallies, was mostly about the story, the CEO said, referring to the cryptocurrency’s run from about $1,000 to $20,000 within one year.

According to Novogratz, the 2017 bull run was primarily about the story of people not trusting the government and wanting more privacy and decentralization. “It was a Gen Z, millennial revolution, and it was global. That’s a powerful story,” the CEO noted.

Bitcoin hitting all-time highs above $69,000 in November 2021, another big rally, was “really generated” by the COVID-19 pandemic, Novogratz said. He suggested that the price action in 2020 and 2021 was “probably 80% story and 20% utility,” referring to the growing utility use case of digitalization amid the pandemic.

Mike Novogratz and Bloomberg's Haslinda Amin at Token2049. Source: Cointelegraph

“Ethereum and all the other level ones started really accelerating the work to build a shared blockchain that we could build companies on top of,” Novogratz stated.

In contrast to the aforementioned cryptocurrency bull runs, the next Bitcoin rally will have to be “50% story, 50% utility,” Novogratz predicted, stating:

“It’s people building applications, people building systems a) that are fast and scalable and b) that are user-friendly. We don’t have them yet — that’s why we’re where we are. But in the next few years, they’re coming.”

During the panel, Novogratz also revved up the audience with his bullish prediction of the “inevitability” that crypto will succeed.

“The word ‘inevitable’ keeps coming up. There’s a sense of inevitability that we’re in the right space, inevitable that Bitcoin will have its day,” Novogratz stated. He also expressed confidence that Web3 and nonfungible tokens will be a big part of the gaming space in the future.

Related: Bitcoin analyst who called 2018 bottom warns 'bad winter' may see $10K BTC

Additionally, the CEO noted that despite the ongoing cryptocurrency winter, Bitcoin has still performed better than a basket of various fiat currencies this year. “If you look at Bitcoin versus a basket of currencies, it’s done about 20% better than versus the dollar,” Novogratz noted.

As previously reported by Cointelegraph, Novogratz has made some successful predictions about Bitcoin. Back in 2020, Novogratz predicted that Bitcoin would end the year above $20,000, which turned out to be an understatement, with Bitcoin nearing the $30,000 price mark by the end of 2020.

Additional reporting by Andrew Fenton.

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Druckenmiller: “We Are In Deep Trouble… I Don’t Rule Out Something Really Bad”

Druckenmiller: "We Are In Deep Trouble… I Don’t Rule Out Something Really Bad"

For once, billionaire investor Stanley Druckenmiller did…

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Druckenmiller: "We Are In Deep Trouble... I Don't Rule Out Something Really Bad"

For once, billionaire investor Stanley Druckenmiller did not say anything even remotely controversial when he echoed what we (and Morgan Stanley) have been warning for a long time, and said the Fed's attempt to quickly unwind the excesses it itself built up over the past 13 years with its ultra easy monetary policy will end in tears for the U.S. economy.

“Our central case is a hard landing by the end of ’23,” Druckenmiller said at CNBC’s Delivering Alpha Investor Summit in New York City Wednesday. “I would be stunned if we don’t have recession in ’23. I don’t know the timing but certainly by the end of ’23. I will not be surprised if it’s not larger than the so called average garden variety.”

And the legendary investor, who has never had a down year in the markets, fears it could be something even worse. “I don’t rule out something really bad,” he said effectively repeating what we said in April that "Every Fed Hiking Cycle Ends With Default And Bankruptcy Of Governments, Banks And Investors" "

He pointed to massive global quantitative easing that reached $30 trillion as what’s driving the looming recession: “Our central case is a hard landing by the end of next year", he said, adding that we have also had a bunch of myopic policies such as the Treasury running down the savings account, and Biden's irresponsible oil SPR drain.

Repeating something else even the rather slow "transitory bros" and "team MMT" know by now, Druckenmiller said he believes the extraordinary quantitative easing and zero interest rates over the past decade created an asset bubble.

“All those factors that cause a bull market, they’re not only stopping, they’re reversing every one of them,” Druckenmiller said. “We are in deep trouble.”

The Fed is now in the middle of its most aggressive pace of tightening since the 1980s. The central bank last week raised rates by three-quarters of a percentage point for a third straight time and pledged more hikes to beat inflation, triggering a big sell-off in risk assets. The S&P 500 has taken out its June low and reached a new bear market low Tuesday following a six-day losing streak.

Druckenmiller said the Fed made a policy error - as did we... repeatedly... last summer - when it came up with a “ridiculous theory of transitory,” thinking inflation was driven by supply chain and demand factors largely associated with the pandemic.

“When you make a mistake, you got to admit you’re wrong and move on that nine or 10 months, that they just sat there and bought $120 billion in bonds,” Druckenmiller said. “I think the repercussions of that are going to be with us for a long, long time.”

“You don’t even need to talk about Black Swans to be worried here. To me, the risk reward of owning assets doesn’t make a lot of sense,” Druckenmiller said.

Commenting on recent events, Druck was more upbeat, saying “I like everything I’m hearing out of the Fed and I hope they finish the job,” he said. Now, the tightening has to go all the way. “You have to slay the dragon.” The problem is that, as the BOE demonstrated with its QT to QE pivot today, it's impossible to slay the dragon and sooner or later every central banks fails.

What happens then? According to Druck, once people lose trust in central banks - which at this rate could happen in a few weeks or tomorrow - he expects a cryptocurrency renaissance, something which may already be starting...

... and not just there, but in the original crypto - gold - as well...

Excerpts from his interview below:

Tyler Durden Wed, 09/28/2022 - 12:26

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Next Bitcoin bull run to be half story, half utility: Mike Novogratz at Token2049

The next Bitcoin rally will require fast and scalable systems, which the community is yet to build, Galaxy Digital CEO Mike Novogratz.

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The next Bitcoin rally will require fast and scalable systems, which the community is yet to build, Galaxy Digital CEO Mike Novogratz.

The next Bitcoin (BTC) bull run will have to be much different from historical cryptocurrency rallies in terms of story and utility, Galaxy Digital CEO Mike Novogratz believes.

Compared to previous bull runs, the next Bitcoin rally will have to be more focused on utility and less on the story, Novogratz predicted at a panel at the Token2049 crypto event on Wednesday.

One of the biggest historical rallies, the Bitcoin bull run of 2017, was mostly about the story, the CEO said, referring to the cryptocurrency’s run from about $1,000 to $20,000 within one year.

According to Novogratz, the 2017 bull run was mostly about the story of people not trusting the government and wanting more privacy and decentralization. “It was a Gen Z millennial revolution. And it was global. That's a powerful story,” the CEO noted.

Another big rally, with Bitcoin hitting all-time highs above $69,000 in November 2021, was “really generated” by the COVID-19 pandemic, Novogratz said. He suggested that the price action in 2020 and 2021 was “probably 80% of the story and 20% of utility,” referring to the growing utility use case of digitalization amid the pandemic.

Mike Novogratz and Bloomberg's Haslinda Amin at Token2049. Source: Cointelegraph

“It's theory and all the other level ones started really accelerating the work to build a shared blockchain that we could build companies on top of,” Novogratz stated.

In contrast to the mentioned cryptocurrency bull runs, the next Bitcoin rally will have to be “50% story, 50% utility,” Novogratz predicted, stating:

“I see it's people building applications, people building systems that are fast and scalable and that are user friendly. We don't have them yet. That's why we're where we are. But in the next few years, they're coming.”

During the panel, Novogratz also revved up the audience with his bullish prediction of the “inevitability” that crypto will succeed.

“The word inevitable keeps coming up. There’s a sense of inevitability that we're in the right space, inevitable that Bitcoin will have its day,” Novogratz stated. He also expressed confidence that Web3 and nonfungible tokens will be a big part of the gaming space in the future.

Related: Bitcoin analyst who called 2018 bottom warns 'bad winter' may see $10K BTC

Additionally, the CEO noted that despite the ongoing cryptocurrency winter, Bitcoin has still performed better than a basket of various fiat currencies this year. “If you look at Bitcoin versus a basket of currencies, it's done about 20% better than versus the dollar,” Novogratz noted.

As previously reported by Cointelegraph, Novogratz has made some successful predictions about Bitcoin. Back in 2020, Novogratz predicted that Bitcoin would end the year above $20,000, which turned out to be an understatement, with Bitcoin nearing the $30,000 price mark by the end of 2020.

Additional reporting by Andrew Fenton.

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