The Coming Storm – How to Deal with IRS’ Increased Efforts in Tax Enforcement and Compliance

In recent years, we have seen the number of audits conducted by the IRS decrease significantly. For calendar year 2007, the IRS’ overall audit percentage was 0.8% of returns filed. That means that only one in about 120 returns was audited, and many of those were high-income individuals and businesses. Comparing this to 2006 data (when the audit rate was 1.6%) shows us that IRS is auditing only about half as many returns as in the past. This has led to a taxpaying public that is less and less concerned with the risk of an IRS audit.

That’s all about to change if IRS has anything to say about it.

The IRS recently announced an initiative to increase staffing for audit and compliance staff. They also announced a renewed effort to close the “tax gap” – the hypothetical difference between what the tax people should pay and what they do pay. Finally, IRS announced that it will devote more resources to collecting past due balances from taxpayers. So what does this mean for the average taxpayer? There are three main points we at Cook & Associates are advising our clients to be aware of in a time of increasing IRS scrutiny:

• First, we make sure our clients know to keep adequate records of their reported income and expenses. In our experience, the biggest reason taxpayers lose deductions under audit is a lack of proper substantiation. Expense reports, business receipts, sales slips, and any other document that supports a taxpayer’s deductions should be kept for a minimum of seven years.
• Second, we advise clients to be sure to consider the risks they take when filing their tax return. This might not be the best time to try a hyper-aggressive tax strategy or to venture too far into a grey area when it comes to taking tax deductions. The tax code does have some room for interpretation, but there are many areas where the rules are “black and white”.
• Finally, in the event that a taxpayer is unable to pay their tax liability in full, we advise that they deal with the situation proactively. Many people choose to wait and see what IRS will do about a past due tax bill – we can promise that they will try to collect – with interest and penalties. There are several programs available to delinquent taxpayers. These programs work best when a liability is addressed immediately, not when IRS has already placed tax liens or levies on a taxpayer’s assets.

If you have any questions about dealing with a potentially more aggressive IRS, or how to keep your tax records “audit proof”, please contact our offices.

-- Dan Musick