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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."


CPAs, accountants, bookkeepers, enrolled agents, and attorneys without a tax specialty may not have the time, experience, education, insight or technical skill to deal with the technical analysis, legal research, identification of issues, interpretative creativity and insight, negotiating skills, knowledge of the IRS , or technical writing ability necessary to effectively prevent avoidable tax overpayments.


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