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    Good News-Bad News II

    TAX FOCUS: AUDITS

    (Bad News first this time).

    I swiped some germane quotes from the Arkansas Society of Accountants monthly newsletter (sorry, it's the best ref I can come up with--Clinton was a Rhodes Scholar--I'm not--guess he'd quote from the Oxford Snot Review or whatever). This is a bit dated, but still germane (note to Gabriele: that's nothing against your homefolks; it's just a snappy adjective that my French teacher liked to use and I've been dying to show it off). I think this stuff was written in December, 2004.

    A few random blurbs from that phamplet:

    The IRS is entering a new era under new Commissioner Mark W. Everson -- with tax enforcement returning to center stage. Former Commissioner Rossotti was a business manager on whose watch IRS audit rates fell to historic lows of 6/10 of 1% (BART: his motto was laissez faire {from the French}, or, "leave business alone," that is, don't interfere with commerce except to the minimum required by law). Everson, a former accountant (BART: he knows all our "tricks,' dadgummit), has a more traditional view of enforcement and increasing it is his top priority. IRS is now adding new personnel to its enforcement functions. They added 150 new agents in 2004 to the Criminal Investigation Division and are planning to add 576 more in 2005. They added more than 1,000 personnel to general audit functions in 2004 and want to add another 5,000 in 2005, mostly working on enforcement.

    Some of the top targets will be the self-employed and small businesses. Almost half of the planned increase in audit resources is scheduled to be applied to this one area (BART: Oh, Lordy, Lordy; what have I done to deserve this?). The rationale for this is that "since they may receive income that has not been reported to the IRS on information returns, such as 1099s and W-2s, this gives them greater opportunity than most individuals to underreport income and to exaggerate deductions (BART: gosh; obviously we're dealing with mental giants here)."

    Specially targeted are those with high "total positive income" (TPI) before taxes, but low "net taxable income" after claiming deductions and other tax breaks. (BART: I think they mean if clients haul in $100K, a fair chunk of it -- maybe more than that $2K they've been turning in to you -- should "stick to them" and, also, a boarder pointed out recently that the red flag's doubly noticeable if they get EIC too).

    Okay, now the Good News:

    The ratio of TPI to net taxable income that is considered "high" by IRS varies by type of business. Taxpayers can learn what this ratio is and learn of other "red flags" for various kinds of businesses from "Audit Technique Guides (a manual for agents)," which is published by the IRS (BART: I used to have a copy of this, but it got lost somewhere since I haven't had an audit in about ten years--guess you could get it at the IRS website).

    While audits of individuals with $100K AGI increased 30% in '03 and audit numbers of those t/ps increased from 140,000 to 195,000 for '04, what the IRS is reluctant to say about audit coverage is this: Most of the increase in audits is in correspondence-based examinations, which are not exactly comprehensive. Example: The IRS questions a charitable contribution, but that's all. Since it's not an "IRS-office" audit, they don't discover that maybe the taxpayer has failed to report a significant amount of income (BART: Basically, taxpayers get an "audit" letter asking why they donated a car to their brother-in-law. It's not good news, but writing back's a whole lot easier on the nerves than going to the boogeyman's office in person).
    Last edited by Black Bart; 12-17-2005, 07:12 AM.

    #2
    IRS Audits

    Bart:
    The IRS site for Audit techniques:


    The Tax Book arrived. Observation: anyone that can reduce a 28 page IRS Pub to 1.25 pages can't be all bad. HA

    Congrats on a job well done. A huge amount of brain power went into a well planned publication.
    Last edited by RLymanC; 12-17-2005, 06:41 PM.
    Confucius say:
    He who sits on tack is better off.

    Comment


      #3
      Construction Businesses are in trouble!

      Sounds like the construction business are going to be in a lot of trouble!
      1. Try to underbid everyone else for the job!
      2. Machines breakdowns
      3. Lots of other stuff!<HEHE>
      4. Material prices went up in the 2 weeks since you bid!
      5. Lots of other other stuff<hehe>
      6. (Arkansas only) all the workers take off because it's hunting season, your over your time limit!

      Seen it too many tims 100k Gross, 10k net! 70k materials! 20k other(including payroll)

      Comment


        #4
        Looking in the wrong place?

        If the IRS wants to find taxpayers with unreported income, shouldn't it be looking at returns ... in notoriously known underreporting industries ... with LOW reported income? Is that too deep to grasp? Or is it just too dang hard to do? I've always thought this is where most of the non/underreporting is going on. The IRS's announcement that it will increase audits of $100K+ TPI returns certainly tips off self-employed's exactly how to avoid being audited.
        Roland Slugg
        "I do what I can."

        Comment


          #5
          Yes, looking in wrong place

          Obviously, the most potential for underreported income is in cash industries. Open air food markets in Philadelphia - there must be thousands of them in Philly and all over the Northeast. Vending machine companies all over the country. Even convenience stores who don't ring up the cash register.

          But remember, the auditor must concentrate on what can easily be collected instead of where the obvious potential is. It's much easier to simply match information returns with a computer than to chase down someone in an open air market who has no paper trail.

          Even if you have a whistleblower, do you think the IRS would snoop around and observe underreporting practices?? Oh no -- instead they interrogate the whistleblower such that they get the guy to make a legal case against the suspect. Then they promise the whistleblower his information will be treated with confidentiality. But they get so much information that the suspect can by process of elimination figure out exactly who squealed.

          A parallel exists in the rural South -- guy I know is a public drunk with 3-4 DUIs. Broke -- never a penny to his name and his to borrow from his family to make ends meet. Certainly not enough money to pay a lawyer or the mandatory fine, so they throw him in jail a number of times. Of course, this doesn't create any money either.

          So I overheard the sheriff telling a deputy "Don't stop Jamison any more. He doesn't have any money and we'll just have to put him up for another month or so."

          It is finally in my old age that I come to realize the hard, cold facts about enforcement agencies, whether it be IRS, police, courts, whatever. The noble objective is rarely the name of the game.

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