Defending an IRS Audit
Budget cuts, a hiring freeze, staffing reductions, an increasingly complex tax code, and a surge in tax refund identity fraud, could decrease the number of IRS audits conducted by the IRS this year.
The IRS’ mission has been historically to detect and stop fraud while responding to taxpayer needs. This mission is becoming difficult due to lack of staffing and reduced budgets. The IRS has increased the number and percentage of audits on all individual tax returns in the past decade, but the rates have plateaued at 1.1 % for the fiscal years of 2010 and 2011.
This translates into one out of 90 filers being audited, said Michael Lacey, a Georgia Institute of Technology mathematics professor. In a real world scenario, a person would have be more likely to roll six dice and have six unique numbers appear on the first role than to be audited, stated Lew Lefton, Internet technology chief at Georgia Tech’s math school.
These statistics hold true for most middle class families with wealthier filers facing higher audit rates, IRS data shows.
IRS Deputy Commissioner Steven Miller said the audit rate “may drop a little bit this year” because the agency reassigned workers to help deal with a jump in cases of identity-theft related tax-refund fraud.
This low audit rate is not a first for this country. From 2001-2006 the overall audit rate dropped below 1%.
Miller stated the IRS is not worried about the dip in audit rates saying “We may not be able to do everything, but we’re going to ensure that we do what we have to do.”
Last year the IRS processed more than 234 million tax returns, bringing in more than $2.4 trillion to fund the federal government. The net tax gap (the difference between what taxpayers owe in a year and what’s not paid on time because of mistakes or fraud) totals $385 billion, just below the market value of all ExxonMobil stock.
Computer Technology Combats IRS Fraud
The budget for IRS’ 2012 fiscal year totals $11.8 billion, which is a 2.1 % cut from 2011. This budget cut marks the second consecutive budget reductions.
Nina Olson, National Taxpayer Advocate, stated in her 2012 annual report to Congress, the decreases have left the IRS “unable to adequately detect and address non-compliance, requiring honest taxpayers to should a disproportionately large share of the tax burden.
These cuts may not be the only cuts the IRS receives. Rep. Jo Ann Emerson, R-Mo, chairwoman of the House Subcommittee on Financial Service and General Government, stated, “The IRS may have to bear a greater proportion” of future cuts.
Computer technology is currently used to help in spotting potential abuses.
The electronic screening uses what the IRS calls, tolerance levels. Tolerance levels are secretive dollar values or other measures, which are programmed into IRS computers as trigger points. Basically, if a tax return falls within the tolerance levels, it is unlikely to be manually checked. The IRS now suspects scammers are testing the tolerance levels with fraudulent tax returns.
A 2008 audit by the Treasury Inspector General for Tax Administration, which oversees the IRS, shows that the tax agency failed to use empirical data to set tolerance levels and evaluate their effectiveness. As Mark Matthews, the IRS deputy commissioner for services and enforcement from 2003 to 2006 stated, some tolerance levels were “picked by the seat of the pants”.
IRS spokeswoman Michelle Eldridge said tolerance level protocols and effectiveness are now checked annually.
IRS Fraud and Tax Returns
This past year, the IRS was able to block more than $14 billion in refunds from fraudulent tax returns, much of it related to identity theft.
J. Russell George, the head of the Inspector General’s office said last month that Congress should expand IRS access to wage and withholding data that the Department of Health and Human Services gets from employers for Social Security records. This would assist in spotting fraudulent refund claims by checking taxpayers’ filings against the data.
The IRS is also operating with 5,000 fewer works as compared to last year. Sixty percent of the staffing reductions came from enforcement jobs. The total IRS workforce fell to 91,380 from 94,346, a 3.1 % drop. With identity-theft related frauds soaring by 431% from 2010 to 2011, the need for enforcement related jobs is increasing.
Many identity-theft tax fraud workers also currently work as telephone assistors to help taxpayers. These workers are also trained to answer taxpayer calls on Mondays during tax-filing season, in hopes of reducing call waiting times.
Another large issue surrounding tax fraud has to do with the Earned Income Tax Credit. This tax credit is designed to help low-and moderate-income working individuals and families keep more of their paychecks. Currently the program is being plagued by improper payments that resulted from fraud and from erroneous claims which are being attributed to taxpayer mistakes. The IRS lacks effective procedures to determine whether applicants are eligible before payments are actually issued, stated George, the Treasury inspector general in his March congressional testimony.
Earned Income Tax Credit fraud resulted in $14 billion to $17 billion of improper payments in 2011.
The IRS was able to block nearly $4 billion in Earned Income Tax Credits in 2010. The IRS is hoping to stop even more with new rules that require tax preparers to register and complete a check sheet showing they made sure clients are eligible for the credit when filing.
Complexities in the Tax Code
Another issue facing the IRS is a complex tax code. “If it’s harder for the taxpayer to fill out their return, it’s harder for use to verify it,” stated Miller.
It isn’t all bad news for the IRS. The IRS has collected more than $4.4 billion from their crackdown on offshore tax evasion. The IRS is also getting two new income information streams that will be used to double-check some taxpayer-filed data.
If you have been contacted by the IRS, or the South Carolina Department of Revenue, contact our IRS audit defense attorney today for a free consultation today. 803.252.4800