'Audits From Hell' Target Rich

The effects of tax evasion just keep rolling in. Widespread abuse of the tax system by some wealthy taxpayers has prompted the IRS to adjust their audit priorities. The Wall Street Journal ran a story stating the IRS has already begun intensive examinations through a new investigation unit. The IRS assigned its top investigators to the Global High Wealth Industry Group and their marching orders? Go after hedge-fund managers, investors and anyone else who might use complicated tactics to evade their tax obligations.

What does this mean? If you’re a wealthy taxpayer, watch out! These auditors are aggressive, relentless, and ready to dive deep into your finances.

The Wall Street Journal reports

The reviews performed so far have been particularly harsh, say attorneys. Investors are being asked to turn over numerous hard-to-get documents in short order. These are "the audits from hell that your grandfather warned you about," says Charles P. Rettig, a partner at Hochman, Salkin, Rettig, Toscher & Perez in Beverly Hills, Calif.

The IRS unit, known as the Global High Wealth Industry Group, was set up last year. It began conducting audits earlier this year—but tax attorneys say the group is only recently getting up to speed. The unit is headed by Donna Hansberry, a longtime litigator for the tax agency who was formerly a senior legal adviser on the IRS commissioner's staff.

Rarely has the agency conducted audits of the wealthy and their businesses or investments in the same way as it looks at large companies, according to advisers. Now, though, these individual audits will be in the hands of agents who have worked on coordinated corporate audits. Given their experience and sophistication, according to advisers, the agents will be better at unearthing trouble.

Miriam L. Fisher, a tax attorney and partner at law firm Morgan Lewis in Washington, says the audit teams comprise "A-list examiners" drawn from around the country who are knowledgeable and experienced with various financial products and industries. The audits are so intensive that each team is handling only a few right now and they aren't far along in the process, she says.

Read more here

IRS Spending More Time Auditing Small Businesses

Syracuse University's Transactional Records Access Clearinghouse (TRAC) highlights an upsetting fact in a new report. As if April 15 isn’t stressful enough for small-business owners, over the last five years, the Internal Revenue Service has increased the hours it spends auditing small businesses with less than $10 million in assets, by 30%, while in the mean time reducing the time it spends auditing large corporations with $250 million or more in assets by 33%. During the same period, audit hours devoted to mid-size corporations ($10 million to $250 million in assets) grew by 13%.

The author of this article on Forbes.com, Dean Zerbe, says he has “just scratched the surface of this insightful report, which should be available to the general public Monday morning, [April 19th, 2010] at TRACs website."

Read Dean Zerbe’s full article about this audit increase here: IRS Audits Small Biz More, Big Guys Less Forbes.com.

Reducing your Chances of an IRS Audit

Over the holiday weekend, my YouTube team shot another new episode for our YouTube tax tips video series. In this episode, host Edward Lester explains a few ways to reduce your chances of an IRS audit. You can watch the embedded video below but be check out my YouTube channel to subscribe to my videos.

The IRS Considers Pressing Schools to Further Reveal Their Business Activities

From NYTimes.com:

The Internal Revenue Service is considering expanding its scrutiny of colleges and universities to focus on billions of dollars associated with academic research, federal financing and intellectual property, a senior agency official said on Tuesday.

The expansion of an investigation would put pressure on the schools to further disclose their inner financial workings as the IRS undertakes a major effort to learn more about whether academic institutions are improperly using their nonprofit status to avoid paying certain taxes.

The expansion, while not yet certain, “is on the table,” Lois G. Lerner, the IRS’s director of exempt organizations, said in a brief interview.

As part of its current investigation, which began last October, the IRS sent unusually detailed questionnaires to 400 private and public universities and colleges about their executive compensation policies and their business activities.

While the institutions are not obligated to respond, not doing so can potentially lead to an audit.

The investigation is modeled upon similar scrutiny of hospitals that began in 2006 and has prompted audits, legislative hearings and stricter tax-filing requirements. The idea is to give the IRS a clear view of how the business of academia operates in the 21st century. “Universities are really part of a rapidly evolving sector, and as sectors evolve and the economy evolves, we’re going to periodically take a hard look,” Douglas H. Shulman, the IRS commissioner, said.

IRS Audits More Millionaires

According to ABC News, in 2007 one out of every 11 households with incomes over $1 million were audited by the IRS in 2007. However, the IRS claims it’s auditing rates were up for people of all income levels last year.

The audit rates in 2007 were as follows:

• 9.25% for those with incomes of more than $1 million, up from 6.3% in 2006.
• 2.87% for those with incomes above $200,000, up from 2.5% in 2006.
• 0.93 percent for those earning under $100,000, up from 0.89% in 2006.

The IRS looked at a total of 1,384,563 returns in fiscal 2007. This represents 1.03% of the total individual returns filed with the IRS. The average audit rate was up 7% from the year before. On the business side, the IRS focused on partnerships and mid-market corporations in 2007, especially those with assets between $10 million and $50 million.

IRS to Begin Increasing Amount of Audits

Because of increasing pressure from Congress and the Executive Branch, the IRS has began an effort the drastically increase the number of audits they perform to help lower the ever growing tax gap. Eliminating the tax gap – estimated to be $312 billion to $353 per year – would provide enough money for the federal government to pay for Medicaid’s entire 2007 budget. Montana Senator Max Baucus, the top tax writer in Congress, has publicly demanded the IRS conduct more audits in order to continue to help lower the tax gap.

As a result, the IRS has announced that it plans to do more random audits in the next few years than it has in the past. In addition, the IRS announced plans to conduct more audits of high-risk groups. The Government Accountability Office recently concluded a detailed study on the tax gap and informed the IRS on which high-risk groups have the highest percent of misreporting on their tax returns.

With help from congress, The Government Accountability Office has identified the following groups of taxpayers to have the highest rates of misreporting on their tax returns:

• Sole proprietors reporting on Schedule C forms
• S corporations where owners aren’t taking enough wages in an effort to minimize payroll taxes
• Taxpayers who gamble and underreport their winnings
• Taxpayers who own a farm or are involved in farming
• Taxpayers who take advantage of the Earned Income Tax Credit when they don’t qualify
• Taxpayers who incorrectly report capital gains from sales of investments
• Taxpayers who take itemized deductions on Schedule A for medical expenses, charitable contributions, and non-reimbursed job expenses

However, being in one of these groups does not mean a taxpayer will necessarily be audited. Based on 2005 statistics, a taxpayer’s average likelihood of being audited was around 1%. But if a taxpayer falls into one of the groups listed above their likely hood of being audited increases to above 5%.

The IRS had discontinued its random audit process five years ago in an effort to be seen as a kinder and gentler agency of the government. However, under pressure to increase revenue to offset the tax gap, the IRS has decided to once again target not only returns that raise red flags, but to also select taxpayers to audit at random. Beginning in October, it’s expected that the IRS will target approximately 50,000 income tax returns from 2006. The IRS is warning that not all taxpayers audited will be subject to a scrupulous line by line audit though. Out of the 50,000 returns the IRS aims to audit, they estimate that 8,000 will just be examined by the IRS requiring no action on the part of the taxpayer, and 9,000 of the taxpayers audited will be able to respond to audit inquiries via mail. The remaining 30,000 taxpayers will be required to make face-to-face meetings though. Many of these audits are to be conducted even if the IRS doesn’t suspect a problem, but the IRS is claiming they hope to use the audits to gather information about taxpayer norms.

Shortly after the IRS’s announcement of their plan to increase audits, National Taxpayer Advocate Nina E. Olson delivered a report to Congress identifying the priority issues the Office of the Taxpayer Advocate will address in the coming year. One important aspect of the report was the battle the IRS is facing because of all the pressure being placed on them to lower the tax gap quickly.

"For fiscal year 2008, both the IRS and the Taxpayer Advocate Service (TAS) face similar challenges," Olson claimed. "The IRS is under scrutiny for its efforts to close the tax gap, while TAS is struggling to address taxpayer difficulties that arise as a result of these very efforts."

In multiple prior reports to Congress, Olson has identified the tax gap as one of the most serious challenges in tax administration. She has put together numerous proposals to try and help address it, but nothing has come from her proposals. She has expressed concern that the pressure on the IRS to reduce the tax gap could result in the IRS excessively cutting corners in it’s treatment of taxpayers. She emphasized that Congress needs to play an important role in helping to achieve an appropriate balance.

"IRS oversight should not just be limited to urging the IRS to collect more tax revenue," Olson continued. "Even as Congress directs the IRS to address specific areas of noncompliance, Congress should require the IRS to adopt a long-term research strategy that focuses not only on "closing the tax gap" but also on understanding what it takes to encourage taxpayers to be voluntarily compliant and how to change taxpayer behavior."

Sources
IRS to start auditing more tax returns?
Congress Instructs IRS to Conduct More Audits
More Audits Are Coming; How Can You Cope?
IRS targeting certain deductions in effort to close tax gap
They're back! IRS resurrects random audits

New Audi R8 Spider Sketch

Yesterday CAR Online got ahold of a new official sketch of an Audi R8 Spider. The car features a pair of speedster humps and in lieu of a folding top, the car will feature a removable targa-style roof to reduce complexity. According to CAR, Audi expects most Spiders to be sold in warm-weather areas where the top is likely to come off and stay off for extended periods.

Advice On Being Audited

CNN Money has an article from Gerri Willis on what to do if you get an audit notice from the IRS. In October the IRS will begin reviewing over 13,000 tax returns form 2006 and will continue with similar audits throughout the next few years. The article give more details on what do if you are audited, but the main points are to hire a professional, get organized, and stay calm.