Tax

Who has the IRS been targeting lately?
 
Published Wednesday, May 13, 2009 9:00 am

by Robert H. Sacks, CPA



Audit rates for many taxpayers stayed about the same and some went down


The IRS recently released the 2008 Data Book, a guide to its tax activities in the last fiscal year. As usual, the Data Book contains a wealth of information about tax returns filed, revenue collected and enforcement actions taken. It shows how important it is for taxpayers to remain vigilant and compliant. Here's a summary of some of the latest key statistics.

Individual Audit Rates: Almost 1.4 million individual tax returns were audited during the 2008 fiscal year, out of a total of 137.8 million returns filed. This works out to an audit rate of 1%, which is about the same as the individual rate for 2007.

The IRS revealed that of that 1%, only 22.3 percent were face-to-face audits conducted by IRS examiners. The rest were less-demanding "correspondence audits," which generally involve the IRS asking for more information by mail.

The audit rate for individuals with returns showing a total positive income between $200,000 and $1 million remained close to 2%. Surprisingly, the audit rate in 2008 for those with incomes above $1 million dropped to 5.6% (from 9.3% in 2007). The IRS attributes the drop-off for millionaires to several factors, including devoting resources to the implementation of economic stimulus checks last year.

Did you use credit
to pay your tax bill?

Credit or debit card convenience fees charged for paying federal individual income taxes electronically are deductible for some taxpayers who itemize.

Processors normally charge fees when taxpayers use credit or debit cards to pay taxes. Fees vary but average about 2.5 percent of the payment.

According to the IRS, convenience fees associated with federal tax payments, including payment of estimated tax, can be included as a miscellaneous itemized deduction. However, only miscellaneous expenses that exceeded 2% of your adjusted gross income can be deducted.

So not everyone who pays fees will be able to deduct them. First, you must file a Form 1040 Schedule A to itemize expenses. And then, you must have enough miscellaneous expenses to exceed the 2 percent threshold. These include tax preparation costs, job search expenses and unreimbursed employee expenses.

Business Audit Rates: For corporations with less than $10 million of assets, the audit rate was 1% (up slightly from 0.9% in 2007). The audit rate for corporations with $10 million or more in assets was down to 15.3% (from 16.8% in 2007). For S corporations and partnerships, the figures were similar to the prior year (both 0.4%).

Financial Services Companies: New data reveals that the IRS audited only about 15% of large financial services companies last year -- compared with 64% of corporations of similar sizes. Large financial service companies include banks, insurance companies, investment advisors, brokerage houses, securities services, and similar firms with $250 million or more in assets.

The data comes from a report by Syracuse University's Transactional Records Access Clearinghouse (TRAC). The organization obtained the IRS data with a Freedom of Information Act request.

Penalties: The IRS assessed 30.22 million civil penalties against individual taxpayers in 2008 (up from 27.33 million in 2007). The majority of penalties levied against individuals and corporations were for failure to pay taxes due and underpayment of estimated tax.

Criminal Cases: In general, most IRS cases are civil rather than criminal. Despite taxpayer fears, it is rare to be put in jail for a tax offense.

In 2008, the IRS initiated 3,749 criminal investigations, which resulted in 2,144 convictions. Of those sentenced, 80.9% were incarcerated. (In the prior year, the IRS initiated 4,211 criminal investigations, 2,837 cases were referred for prosecution and 81.2% of those sentenced were incarcerated.)

What kind of people land in jail for tax crimes? Tax protestors who refuse to file returns and pay taxes, people who willfully evade taxes or engage in tax fraud and those engaging in crimes with such tax components as money laundering and drug trafficking.

In some cases, the IRS also goes after celebrities and other high-profile folks who flaunt their tax responsibilities. As the Criminal Investigation division notes on the IRS Web site: "Publicity of these convictions provides a deterrent effect that enhances voluntary compliance."

Offers in Compromise: An Offer in Compromise is an agreement between a taxpayer and the government that settles a tax liability for payment of less than the full amount owed.

According to the IRS, an offer will be accepted "when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential."

In 2008, 44,000 offers in compromise were received by IRS. Of these, 11,000 were accepted. This reflects a somewhat downward trend in requests from recent years. In 2007, for example, 46,000 offers in compromise were received by the IRS in 2007 and 12,000 were accepted. The acceptance rate remains about the same at approximately 4%.

The question many taxpayers ask is:

"How can I avoid being targeted for an audit?"

No one can give you a 100% guarantee that you won't be tapped for audit because some returns are picked randomly as part of a research program that helps detect items such as underreported income and overstated deductions.

However, completing your tax returns in a timely, orderly and accurate fashion with the help of your trusted tax advisor certainly works in your favor.

It is true that some groups tend to be audited more than others and some items on tax returns are likely to draw greater scrutiny. The IRS uses a secret computer scoring method which flags returns for audit. Although no one outside the agency knows the exact formula, there are audit red flags that have been known to catch the attention of the IRS. For example, operating a business that deals mainly in cash or deducting large charitable gifts of property.

However, don't be concerned if you have items on your tax return that involve possible audit triggers. With the proper supporting records and your tax advisor's help, you can successfully respond to IRS inquiries. We can help. Call us today.

Robert H. Sacks, CPA is a Principal in the Tax Services Department and is based in our Boca Raton office. With over 25 years of experience in public accounting, he monitors tax law changes and helps oversee our tax practice to ensure that the highest quality technical services are provided and compliance standards are maintained.  Rob focuses on international tax matters, working with American companies that have overseas manufacturing or operations and foreign companies that have US operations.  He also provides consulting on complex tax transactions and structuring, including real estate matters, executive compensation and mergers and acquisitions. Contact him directly at rsacks@daszkalbolton.com or by phone at 561.953.1488.


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