Audit statistics

[Black Bart]

from Lasser's: IRS has audited 46,000 returns from 2001. The "tax gap" (difference between taxes paid and taxes actually due) was $345 billion. The audits were part of their three-year National Research Program to update IRS's audit selection criteria. The audits confirmed that the lion's share of the tax gap was underreporting by individuals -- $68 billion was non-farm Schedule C sole proprietors (no surprise there) who reported only 48% of taxable income. Audit odds increased sharply for Schedule C filers reporting gross receipts of $100,000 or more.

Total individual audits for 2005 -- 1,215,308. Up 21% from '04.

Possible tax gap remedies suggested: backup withholding on 1099s for independent contractors, requiring reporting of stock cost as well as sales, 1099s for corporate income from personal services.

"Face-to-face" audits have fallen and "correspondence" audits were up and are a large part of the increase (I don't know why they even call them "audits." They just send a letter, say you left this off, please send the money. What's tough about an "audit" like that?)

[Jiggers]

Audits

Schedule C and F clients have the mistaken impression that if it is not on a 1099, then you don't have to report it. The main problem is that clients use Hip Pocket National Bank and dont' keep good records. They get caught paying for a lot of business expenses with cash, based on the cash receipts, and then when the auditor asks where the cash came from, they have no response. I am not talking about pennies, I have had clients come in with cash receipts for computers, cattle, feed, office supplies, equipment, etc.

Too many taxpayers do work for those that do not have to send out 1099's. For instance, home owners do not have to send out a 1099 to their yardman, electrician, plumber, carptenter, etc. I know some of these that will work only for individials and not for businesses because they don't want a 1099.

Farmers are a big problem too. I am surprised that the IRS hasn't done a major audit of farmers. They sell lots of cattle in their kids name with the mistaken impression that it is not taxable. Lots of cattle. Also, the only cattle sales that they report are when they deposit the check in the bank. If they took the cattle sales check to the bank and cashed, it is not reported. I have caught some clients with this who by mistake gave me the sales on the livestock with their kids names or were cashed and not deposited. I questioned why these were not on their taxpayer information and they pulled them and took their business elsewhere.

If the livestock sales companies were required to issue 1099's for all cattle sold, I think the IRS would see a very large improvement in income.

Also, farmers that produce their own hay tend to sell some of it for cash to others. I know because the buyer of the hay will bring me a cash receipt for the hay and the seller, who I also do, does not report the hay sale!

What do you do?

[veritas]

I also read recently somewhere that municipal bond interest should be or will be required to be reported to the IRS.

[Jan]

municipal bond

I also read recently somewhere that municipal bond interest should be or will be required to be reported to the IRS.

I alway thought that it was report on line 8b From 1040

[Jiggers]

Municipal Bonds

There was no 1099 reporting by the payor. The taxpayer has always been required to report the non-taxable interest income when SS benefits became taxable.

If the taxpayer didn't tell me that he had non-taxable interest income then I didn't use it in the calculation of SS benefits. And the IRS had no way of knowing this amount either.

It will when it is required to be reported by the payor.

[Unregistered]

I also read recently somewhere that municipal bond interest should be or will be required to be reported to the IRS.

Sorry was't very clear.
I meant by the payor to the IRS. I would imagine there also will be seperate reporting for private activity portion so they can get additional amt tax.

[Bees Knees]

I also read recently somewhere that municipal bond interest should be or will be required to be reported to the IRS.

Its in the new tax law. Tax exempt intererst must now be reported on a 1099.

http://www.thetaxbook.com/updates_view.asp?ID=50

[S T]

1099 Tax Exempt

I usually find on the brokerage statements from Merrill Lynch, Citigroup, Wachovia, and Vanugaurd, etc and have in the past always included on the tax forms. The ones I have trouble finding are the ones issued by Franklin, somehow the client always seems to misplace those or have not received them.

So now for sure we will have to report, another item to put into the letter to the client for 2006.

Thanks for brining it to our attention.

Sandy