“Is there a phrase in the English language more fraught with menace than a tax audit?” (Erica Jong, American novelist and poet).
The Tax Compliance Process, although we have begun, through our discussion of the Tax Gap, to look more closely IRS and compliance/collection issues. Following is an excerpt from Thomson Reuters Washington Report.
Despite a $345 million (or 3%) decrease in the fiscal year (FY) 2015 budget for IRS compared to the previous year, total revenues received and collected by the agency hit $3.3 trillion, an increase of 8% from FY 2014, the Treasury Inspector General for Tax Administration (TIGTA) said in an audit released on Sept. 29. (Audit Report No. 2016-30-073) On the other hand, enforcement revenue collected decreased from $57.1 billion in FY 2014 to $54.2 billion in FY 2015, a decline of 5%, TIGTA said, adding that unpaid assessments increased to $412 billion. The audit noted that FY 2015 saw a continued loss in the numbers of IRS employees available to provide taxpayer service and those needed to enforce tax laws. Collection function activities were described as having “mixed results” in FY 2015. “While some areas of compliance declined, collections on delinquent accounts increased in every collection program except Field Collection”, the audit said. The number of examinations conducted in FY 2015 by the Examination function declined. Field examination conducted 28% fewer examinations than in FY 2011. “Declines in the number of examinations are directly related to the 24% decline in the revenue agents and tax compliance officers available to perform them during that period”, the audit said. IRS Budget and workforce comparisons 2010 through 2019 (https://www.irs.gov/statistics/irs-budget-and-workforce).
Nina Olson, former National Taxpayer Advocate, in her 2013 annual report to Congress, issued in 2014 addressed budget cuts and collections. She stated in her report “the logic behind budget cuts simply does not apply to the funding of the IRS.” The IRS collected $255 for each $1 it received in appropriated funds in FY 2013. “If the Chief Executive Officer of a Fortune 500 company were told that each dollar allocated to his company’s Accounts Receivable Department would generate multiple dollars in return,” the report says, “it is difficult to see how the CEO would keep his job if he chose not to provide the department with the funding it needed. Yet that is essentially what has been happening with respect to IRS funding for years.”
Due partially to these budget constraints, IRS heavily utilizes correspondence audits as evidenced by the following 2014 highlights:
- The IRS audited a total of almost 1.4 million tax returns, approximately 0.7 percent of all returns filed in Calendar Year (CY) 2014
- The IRS audited 0.8 percent of all individual income tax returns filed in CY 2014, and 1.3 percent of corporation income tax returns (excluding S corporation returns)
- IRS conducted the majority of Fiscal Year 2015 audits, 72.6 percent, via correspondence. The remaining 27.4 percent were conducted in the field
Although the numbers are low, audits still are a very real part of the compliance process. Look through the following IRS websites:
- IRS (https://www.irs.gov/businesses/small-businesses-self-employed/irs-audits?_ga=1.26058109.1118835913.1471234991)
- The Examination Process (https://www.irs.gov/pub/irs-pdf/p3498.pdf)
- Audit Technique Guides (https://www.irs.gov/businesses/small-businesses-self-employed/audit-techniques-guides-atgs?_ga=1.21870075.1118835913.1471234991)
IRS makes its audit technique guides available.
The Internal Revenue Manual (IRM) is available through (https://www.irs.gov/irm/part4)
This section addresses the examination process. This, in connection with the audit technique guide, allows the taxpayer and representative access to the playbook as set forth by IRS.
Were you aware that IRS provided this information? Look at an audit technique guide for the industry/business of your choice and briefly discuss an aspect that may have surprised you.
Your text also addresses IRS Appeals. AICPA publication The Tax Advisor presented a concise but informative article discussing Appeals interaction entitled “IRS Appeals Provides a Pathway to Settlement (https://www.thetaxadviser.com/issues/2016/jan/irs-appeals-provides-pathway-to-settlement.html).” The text states that appeals brings about 80% of its cases to successful resolution. Having frequently utilized the appeal function in our practice, all my cases came to successful resolution that I felt was a fair and just outcome of the dispute. Look more closely at the appeals function. Discuss the independence of Appeals, prohibition of ex-parte communications, and hazards of litigation.
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