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:: IRS gets 'meaner' by increasing audits of high-salaried taxpayers
IRS gets 'meaner' by increasing
audits of high-salaried
taxpayers
Memphis Business Journal - June
30, 2006
by Christopher Sheffield
The
Internal Revenue Service's
efforts to close the growing tax
gap -- the difference between
what the IRS believes taxpayers
should pay and what they
actually fork over -- is being
greeted with mixed reactions
from lawyers, accountants and
trade associations that work
closely with the federal agency.
The tax gap is estimated at $345
billion, derived from a
three-year study called the
National Research Program which
audited 46,000 individual income
tax returns for 2001.
Since 2001, the IRS has begun
cutting into that figure through
new education programs, expanded
reporting criteria and increased
audits of taxpayers who earn
$100,000 or more a year.
The agency says those efforts
raised enforcement revenues by
40% to $47.3 billion in 2005, up
from $33.8 billion in 2001.
Audits of high-income taxpayers
hit a 10-year high in 2005 at
221,000. Total audits jumped 20%
last year to 1.2 million.
Alvin Brown, a former IRS
attorney who now leads his
private tax practice
Alvin Brown & Associates,
thinks that in an effort to
collect more taxes the agency
has become a bit overzealous
and, in some cases, downright
unfriendly.
"They've gotten more difficult
to work with," Brown says.
"Instead of collecting money,
they've gotten meaner."
What the IRS is not saying in
its tax gap report, Brown says,
is that there is a "collectability
problem" and that there are some
taxpayers who will never be able
to pay.
In principle, the tax system is
still a voluntary reporting
system, he says, and that means
there always will be
discrepancies.
"How do you stop a shopkeeper
from putting money in his pocket
and not the register," he says.
"If they cheat and lie, and they
shouldn't, it's tough to get
them."
The IRS acknowledges that the
tax code is part of the problem
and that simplifying the code
would help reduce the gap.
BDO Seidman regional tax partner
Mark Puckett says his experience
with the IRS has been mostly
positive. Still, he says he has
seen increased audit activity by
the IRS in the past couple of
years in Memphis, particularly
in the non-profit area where
there has been a rise in
reported abuses.
As for one of the IRS' stated
target areas -- taxpayers who
earn over $100,000 -- Puckett
says it makes sense because so
much of their income is now
trackable, through W-2s and
reports generated by banks,
brokerage firms and other
investment entities.
Even then, his experience has
been that audits of those
individuals are targeted and
specific, examining such
deduction "risk areas" as travel
and entertainment, auto usage,
repairs and gifting.
And then there are certain
industries -- such as
restaurants, landscaping and
construction -- that always seem
to catch the IRS' attention.
Many of those businesses are
small, family owned enterprises
where tax records are less
formal and "sometimes the
records are informal
intentionally."
"How do you get cash-based
transactions on tax returns?
It's tough," Puckett says.
Education, not intimidation,
appears to be the IRS's new
approach in his experience, says
Ronnie Hart, president and CEO
of the 1,200 member
Tennessee Restaurant Association.
Several years ago the restaurant
industry and the IRS created a
tracking agreement that
basically got the restaurant
association to agree to make an
effort to educate employees
about the tip reporting process
and commit to reporting as
accurately as possible. In
return, the IRS backed off of
many of the widespread auditing
that Hart's members used to
complain about regularly.
"I'm not saying they still don't
do it," he says. "But it's
something they've been more
cooperative with and taken more
of an educational approach."
In the end, there is still
always the fear of the dreaded
audit that is the agency's best
collection weapon, Puckett says.
"They have to create an aura of
enforcement and, if nothing
else, that's the biggest tool
they have at their disposal."
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