![IRS EXAMINATION AND ENFORCEMENT J. Eric Butler Woolf, McClane, Bright, Allen & Carpenter, PLLC 900 S. Gay Street Knoxville, TN 37902 (865) 215-1000 [email_address] Circular 230 Notice: These materials are designed to provide general information. Although prepared by a professional, these materials should not be utilized as a substitute for professional legal advice in specific situations. If legal advice or other expert assistance is required, please consult with an attorney.](https://image.slidesharecdn.com/seviervillechamberofcommercepresentationfeb2011-12979851428894-phpapp02/85/IRS-Enforcement-and-Examination-1-320.jpg)
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IRS Enforcement and Examination
- 1. IRS EXAMINATION AND ENFORCEMENT J. Eric Butler Woolf, McClane, Bright, Allen & Carpenter, PLLC 900 S. Gay Street Knoxville, TN 37902 (865) 215-1000 [email_address] Circular 230 Notice: These materials are designed to provide general information. Although prepared by a professional, these materials should not be utilized as a substitute for professional legal advice in specific situations. If legal advice or other expert assistance is required, please consult with an attorney.
- 2. The IRS Organizational Chart Commissioner Douglas Shulman Examination Division Collection Division Criminal Investigation Division
- 3. How Policy Drives the IRS Mission A look at the history
- 4. Annual Enforcement Results: Where is the Service Focused?
- 5. Staffing for Key Service Positions
- 6. Examination of Individual Returns: Type of Audit
- 7. Examination of Individual Returns: The Audit Lottery
- 8. Examination of Business Returns: The Audit Lottery
- 12. Underreporting Noncompliance is the Largest Component of the Tax Gap
- 13. 2001 Federal Tax Gap Study – Underreporting (In Billions of Dollars) Underreporting ($250 to $292) Individual Income Tax ($150 to $187) Corporation Income Tax ($30) Employment Tax ($66 to $71) Estate and Excise Tax ($4)
- 14. IRS Examination Division You Lost the Audit Lottery – Now What?
- 18. Examination Overview by Taxpayer Advocate Nina Olsen
- 25. 10 ways to annoy an IRS Agent
- 26. IRS Collection Division You owe the IRS money or you have not filed returns – Now What?
- 30. IRS Tax Lien Policy and Problems
- 33. Will the IRS find out I have not filed my returns?
- 34. Commissioner Shulman’s Congressional Testimony on 2011 Filing Season
Notas do Editor
- Caution about questions related to a specific ongoing audit or collection issue. Ask me afterward. Unless you deal with the IRS on a daily basis, I have found that most taxpayers and citizens don’t really understand how the IRS works. They just know it is bad when you have to deal with the IRS.
- THIS IS AN OVERSIMPLIFICATION OF THE CHART THERE IS ALSO AN APPEALS BRANCH AND IRS CHIEF COUNSEL I WILL DISCUSS THE ROLE EACH OF THESE DIVISIONS CAN PLAY IN A TYPICAL TAXPAYER’S LIFE
- DISCLAIMER - I AM GOING TO START THIS MORNING BY BORING YOU WITH STATISTICS EACH YEAR THE IRS PUBLISHES THE RESULTS OF ITS ENFORCEMENT AND EXAMINATION INITIATIVES FROM THE PRIOR YEAR IF ANYONE WANTS A COPY FOR SOME LIGHT NIGHTIME READING, PLEASE E-MAIL ME STATISTICS ARE IMPORTANT TO TAX PROFESSIONALS BECAUSE THEY TELL US WHERE THE IRS IS FOCUSING ITS ATTENTION. WHAT IS IMPORTANT TO THE GOVERNMENT RIGHT NOW? WHAT AREAS CAN MY CLIENT’S EXPECT TO RESULT IN CLOSER IRS SCRUTINY DURING THE YEAR.
- NUMBERS ARE IN BILLIONS OF DOLLARS MOST IRS REVENUE COMES FROM THE EXAMINATION AND COLLECTION DIVISIONS. THUS, IT SHOULD BE NO SURPRISE THE SERVICE PLACES HUGE EMPHASIS ON IMPROVING THE ABILITY OF THE EXAMINATION AND COLLECTION DIVISIONS ABILITY TO INCREASE THEIR COLLECTION RATES. COLLECTION DIVISION IN 2010 = $29.10 BILLION EXAMINATION DIVISION IN 2010 = $16.90 BILLION APPEALS DIVISION IN 2010 = $4.90 BILLION DOCUMENT MATCHING PROGRAM = $4.9 BILLION ALL COMBINED = $57.60 BILLION IN ENFORCEMENT REVENUE IN 2010 (ABOVE WHAT IS SELF REPORTED AND VOLUNTARILY PAID)
- HISTORICALLY THE SERVICE PLACED A HUGE EMPHASIS ON MONITORING VOLUNTARY COMPLIANCE. AS WE WILL SEE, THE EMPHASIS SEEMS TO BE SHIFTING TOWARD A MORE PROACTIVE IRS THAT WILL GO OUT AND FORCE COMPLIANCE. Revenue Officers in 2010 (Collection) = 6,042 (5,451 in 2009 – increased by 591 new ROs or about a 10% increase) Revenue Agents in 2010 (Examination) = 13,888 (12,958 in 2009 – increased by 930 new RAs or about 7% increase) Special Agents (CID) in 2010 = 2,780 (2,650 in 2009 – increased by 130 CID Agents or about 5% increase)
- IRS IS STILL DOING MOST AUDITS BY CORRESPONDENCE CORRESPONDENCE AUDITS IN 2010 = 1,238,632 FIELD AUDITS IN 2010 = 342,762 A FIELD AUDIT IS WHERE THE REVENUE AGENT ACTUALLY COMES OUT AND AUDITS YOUR RETURN OR YOU COME TO THE IRS OFFICE WITH YOUR RECORDS
- The one lottery you DON’T want to win!! PERCENTAGES ARE BASED ON RETURNS FILED PER INCOME CATEGORY FOR EXAMPLE: OF ALL INDIVIDUAL RETURNS FILED IN 2010 REPORTING INCOME OF $1 MILLION OR MORE, 8.36% OF THOSE RETURNS WERE AUDITED BY THE SERVICE. 2010 RETURNS REPORTING INCOME OVER $200,000 = 3.10% WERE AUDITED 2010 RETURNS REPORTING INCOME OF UNDER $200,000 = 1.04% WERE AUDITED THESE INCLUDE CORRESPONDENCE AND FIELD AUDITS COMBINED AS YOU CAN SEE, THE IRS AUDIT FOCUS HAS DRAMATICALLY TRENDED TOWARD HIGHER INCOME INDIVIDUALS SINCE 2008 WHILE AUDIT RATES FOR LESS AFFLUENT INDIVIDUALS HAS REMAINED CONSISTENT OVER TIME. As you can, see there was a major spike in the audit rate of individuals reporting over $1 Million in income on their return. As we will see later on, this is intentional by the Service as the Commissioner is pushing for more enforcement and review of high net worth individuals.
- CONSISTENT WITH ITS FOCUS ON HIGHER NET WORTH INDIVIDUALS, THE IRS CONTINUES TO FOCUS IS AUDITS OF ENTITIES ON THE LARGER CORPORATIONS SMALL CORPORATIONS (ASSETS UNDER $10M) = 0.94% IN 2010 LARGE CORPORATIONS (ASSETS OVER $10M) = 14.16% IN 2010 SUBCHAPTER S CORPORTIONS = 0.37% IN 2010 PARTNERSHIPS (FORMS 1065) = 0.36% IN 2010
- IN THE LAST FEW YEARS, THERE HAS BEEN MUCH DISCUSSION ABOUT THE “TAX GAP”. THE IRS AND CONGRESS HAVE REALIZED THAT A LARGE AMOUNT OF TAX THAT SHOULD BE PAID EVERY YEAR IS NOT MAKING IT INTO THE GOVERNMENT COFFERS. THIS IS LARGELY DUE TO THE FACT THAT THE TRUE TAX LIABILITY OWED FOR A TAX YEAR IS NOT FINDING ITS WAY ONTO THE RETURN, WHETHER DUE TO MISTAKE OR THROUGH INTENTIONAL TAX FRAUD.
- NOTE: PREVIOUS SLIDES SHOW STATISTICAL DATA FOR 2008 THROUGH 2010. REASON = IN 2007 THE IRS PUBLISHED A REPORT ON THE TAX GAP AND SET FORTH A ROADMAP CALLING FOR A SHIFT IN IRS POLICY TOWARD MORE ENFORCEMENT TO CLOSE THE TAX GAP. THE 2007 REPORT HAS BEEN USED BY THE SERVICE TO RETURN TO CONGRESS EVERY YEAR AND ASK FOR ADDITIONAL FUNDING TO CLOSE THE TAX GAP. IRS IS UNDER TREMENDOUS POLITICAL PRESSURE TO BRING IN AS MUCH REVENUE AS POSSIBLE TO FUND CONGRESSIONAL PROGRAMS AND REDUCE THE DEFICIT
- These amounts are in billions of dollars and are based on the 2001 study by IRS. NONFILERS = THOSE WHO DON’T FILE RETURNS AND PAY TAX OWED UNDERPAYMENT = THOSE WHO FILE AND CORRECTLY REPORT BUT JUST CAN’T PAY WHAT THEY OWE THE IRS STUDY OF THE TAX GAP IN 2001 SHOWED THAT UNDERREPORTING (WHETHER BY MISTAKE OR INTENTIONAL FRAUD) IS THE BIGGEST COMPONENT OF THE TAX GAP. GUESS WHERE THE IRS IS GOING TO PLACE A LARGE PORTION OF ITS BUDGET IN THE NEXT FIVE YEARS?
- Clearly, underreporting on individual income tax returns is the largest contributor to the tax gap. IRS HAS LEARNED THAT SMALL BUSINESS OWNERS AND SCHEDULE C FILERS (SOLE PROPRIETORS) ARE FAILING TO REPORT SOURCES OF INCOME (TYPICALLY CASH) OR ARE TAKING ERRONEOUS DEDUCTIONS.
- IN THIS NEXT SEGMENT, I WANT TO INTRODUCE YOU TO THE IRS EXAMINATION DIVISION AND TALK ABOUT HOW THE IRS SELECTS RETURNS FOR AUDITS AND HOW THE SERVICE CONDUCTS THE AUDIT. THE IRS EXAM DIVISION USED TO HAVE AN “EDUCATION” MENTALITY – I.E., HELP EDUCATE TAXPAYERS UNDER AUDIT AND THEIR ACCOUNTANTS ON THE PROPER WAY TO REPORT ITEMS. NOW THE IRS AS A WHOLE, INCLUDING THE EXAM DIVISION, HAS TAKEN ON A PURELY ENFORCEMENT MENTALITY TO CLOSE THE TAX GAP
- The DIF formula and calculation remain a deep dark secret.
- I have clients who come see me often and tell me they called the IRS number on that letter but the person they talked to wouldn’t listen or they never got the same person twice.
- This initial contact letter and the IDR are extremely valuable pieces of information. The IDR will contain requests for information or documents, which give us insight into why the return was audited and the direction the Revenue Agent plans to take the audit. We can also focus our fact gathering to the specific items on the IDR to better understand the client’s reporting position.
- TAXPAYER ADVOCATE IS A SEPARATE DIVISION WITHIN THE IRS WHOSE MISSION IS TO ACT AS A LIASION BETWEEN TAXPAYERS AND THE IRS TO HELP NAVIGATE THE BUREAUCRACY.
- Revenue Agents are trained to gather facts! They are taught to be polite and professional, and to gather data for use by the government in closing the tax gap and/or putting tax evaders in jail! Plain and simple! IN THIS NEW ENFORCEMENT ENVIRONMENT, YOU MUST BE MORE MINDFUL THAN EVER THAT THE REVENUE AGENTS NO LONGER ARE THERE TO EDUCATE YOU AND ASSIST YOU WITH ARRIVING AT THE CORRECT RESULT. THEY ARE THERE TO ENFORCE THE TAX LAWS AND PUSH COMPLIANCE!!! WITH A LIMITED BUDGET, THE IRS CAREFULLY CONSIDERS POTENTIAL CRIMINAL CASES FOR THEIR DETTERENCE VALUE TO THE GENERAL PUBLIC.
- STATISTICS ARE FROM THE TRANSACTIONAL RECORDS ACCESS CLEARINGHOUSE (TRAC) AT SYRACUSE UNIVERSITY. OBTAINED EACH YEAR THROUGH FOIA REQUEST.
- Questions 1 and 2: Section 7602 – authorizes Service to examine a taxpayer’s books and records to determine the correctness of any return and to take testimony; Section 7603 – gives Service the power to summons records in connection with an audit. Question 3: Section 6501 = generally 3 years to audit and assess additional tax Question 4: Section 6531 – general 6 year SOL for crimes involving “tax fraud”
- Clients often come see me after they have attempted to represent themselves in the audit. Unfortunately, they learn the nice, sweet Revenue Agent gave them a final Examination Report that included a huge tax liability and additional penalties and interest. I typically get involved and learn the client ended up saying too much, which is referenced right there in the Examination Report in black and white!
- I WANTED TO END THIS SEGMENT OF THE PROGRAM WITH SOME WISE ADVICE FROM DAVID LETTERMAN ON HOW TO DEAL WITH REVENUE AGENT IF YOUR RETURN GETS AUDITED
- As the name implies, it is the collection arm of the IRS.
- FOR THE LAST SEVERAL YEARS, THE IRS TAXPAYER ADVOCATE HAS LISTED THE IRS COLLECTION DIVISIONS LIEN FILING POLICIES AS ONE OF THE MAJOR CAUSES OF CONCERN FOR TAXPAYERS. THE IRS HAS YET TO TAKE ANY STEPS TO CHANGE ITS LIEN POLICY.
- Financial statements (Forms 433)
- I WANTED TO END THE PROGRAM TODAY BY LETTING YOU HEAR IN COMMISSIONER SHULMAN’S OWN WORDS WHERE THE IRS IS HEADED IN 2011 AND BEYOND!