The Treasury Inspector General for Tax Administration (TIGTA) is responsible for monitoring and directing the IRS’s activities. Recently, the TIGTA estimated that taxpayers will owe $345 billion more than what they actually claim they owe on their income tax returns this year. Because they are expecting this huge gap, they have developed two major goals to recover some of that shortage and to reduce the amount of under-reported taxes owed in future years.
Audit Plan Strategies
The TIGTA attributes a portion of the unpaid taxes owed to a lack of an understanding by taxpayers of the tax laws and procedures. Thus, their first goal is to improve IRS services by making voluntary compliance easier and by decreasing the amount of time it takes for taxpayers to get answers to their questions. The IRS has also been charged with looking for the most effective methods of providing guidance and outreach to taxpayers. In addition, the IRS has been instructed to incorporate taxpayers’ perspectives to make improvements where the taxpayers believe they are needed most. The IRS assumes that taxpayers would pay the correct amount due more often if they simply knew and understood what they owed.
Unfortunately for the IRS, outreach and increased efforts to improve customer service alone will not bridge the $345 billion gap. This leads to their second goal which is to enforce the law to ensure everyone meets their obligation to pay taxes. Above all else, they want to proactively enforce the law in a timely manner while respecting taxpayer rights and minimizing taxpayer burdens. Despite what the person being audited may feel, the IRS’s intent is not to make a taxpayer feel scared or bullied; they only want to ensure tax compliance.
Increased Audit Enforcement
It is no secret that the IRS has cranked up its efforts in order to bring in extra funds in this down economy. What may be a surprise, however, is that no matter who you are, the odds that you will get audited this year have increased. Individuals, for example, have never been at a higher risk of being audited. The IRS performed 1.58 million audits of individual returns last year, equaling 1.1 percent of all individual returns filed. That number is expected to increase over the next several years.
Small businesses (less than $10 million in assets) and mid-sized businesses (between $10 million and $50 million in assets) are also more likely to be audited than in previous years. Small businesses were about 11% more likely to be audited last year compared to two years ago and mid-size businesses were about 8% more likely to be audited. Interestingly enough, the largest businesses (more than $250 million in assets) were actually less likely to be audited last year. Nevertheless, the IRS still audited slightly more than 23 percent of returns for these corporations.
In connection with the increased number of audits, the methods used to identify and select taxpayers to be audited are developing as well. New approaches and tools have become necessary as the challenges of international tax administration have continued to increase.
The IRS is constantly refining its methods and changing how its resources are used in an effort to target existing and emerging high-risk areas.
Knowing that the IRS targets emerging and high-risk areas, there is one thing that all taxpayers should remember. If you are selected to be audited by the IRS, it does not necessarily mean that they believe you are a fraud or that you are going to owe money. Often times the IRS will focus on a certain credit or deduction that has been abused in recent years. If you happen to claim this frequently-abused credit or deduction, even if you do it honestly, you may be at a greater risk for an audit. If you comply with their requests it can be a relatively painless process, but you should seek out an experienced tax attorney or other tax expert if you have any tough questions.
(About the author: Stephen M. Moskowitz is the Senior Partner of Moskowitz LLP, located in San Francisco. His practice of over 30 years covers the entire spectrum of tax law for individuals and businesses.)