Audits - New IRS Audit Initiatives

Audits - New IRS Audit Initiatives

We would like to alert you to some significant changes in the way the IRS targets
taxpayers for audits, and how it conducts the exams. Whether you have read
statistics about the percentage of returns that are audited or heard about the
recent cuts to the IRS’s budget, you might feel justified in playing the odds
that you or your business won't be among those selected by the IRS for
examination. But the numbers are very misleading, because the IRS is getting a
lot smarter about how it chooses returns for audit and how its examiners
conduct their audits.

Heightened
Focus

Over the past few years, the IRS has dramatically stepped up its efforts to study
specific industries, and to educate its examiners about business practices,
terminology, accounting methods, and common industry practices. It has also
identified areas of inquiry that produce audit results. Examiners are told
specifically to look out for certain red flags to get at what is really going
on in a business or transaction. The IRS has also updated its tax gap figures
(the difference between what taxpayers owe and what they pay). Several research studies are underway into various segments of the taxpayer population. That, in conjunction with Treasury reports on IRS audit performance means that
examinations are increasingly focused on business areas and issues that are
likeliest to generate increased taxes, penalties, and interest.

Individuals

In 2012, the IRS released audit rates for fiscal year (FY) 2011, which show a
general show an uptick in audits, especially of higher income taxpayers. 
Individual taxpayers were collectively audited as a 1.1 percent rate over the
FY 2011 period.  The audit rate for individuals with adjusted gross incomes
(AGI) between $200,000 and $500,000 was 2.66 percent in FY 2011 compared to
1.92 percent in FY 2010.  The audit rate for individuals with AGI between
$500,000 and $1 million was 5.38 percent in FY 2011 compared to 3.37 percent in FY 2010.  For individuals with AGI between $1 million and $5 million, the
audit rate increased from 6.67 percent in FY 2010 to 11.80 percent in FY 2011.

Industry
Compliance

Another IRS initiative is to improve compliance by fostering greater communication between the IRS and representatives of various industries. This interplay is intended to clarify treatment of specific tax problems far in advance of an audit. For example, the IRS and the food service industry have come to an
understanding about properly determining and reporting employee tips. Employers that comply will face reduced IRS scrutiny on this issue. Additionally, the IRS has established the Voluntary Classification Settlement Program (VCSP) where employers who have misclassified their employees as independent contractors may come forward before the IRS initiates an audit and voluntarily reclassify the workers in exchange for reduced penalties.

Paul French RTRP, ABA ® www.prep.1040.com/PFRENCHTAXSERVICE/ Member - Iowa Assoc. of Accountants, National Assoc. of Tax Professionals (NATP), National Society of Accountants (NSA), Board Member Iowa Chapter NATP, an Accredited Business Accountant ABA, an IRS Registered Tax Return Preparer RTRP