April 17th, 2012 by Stephanie Erickson
With the April 17 tax deadline quickly approaching tonight, many individual taxpayers are hoping and praying they don’t receive an audit letter from the IRS. Although the number of audits on individual tax returns has increased in the past decade, rates have actually stayed stagnant for the past two years. Audits from last year amounted in $2.4 trillion of tax revenue; increased enforcement could potentially help bring in even more revenue to help fund the federal government. After the release of the latest tax gap number, the IRS has made it clear they plan to hone in on compliance. However, this will be no easy feat in light of recent budget cuts; the 2012 IRS budget was decreased by 2.1% from 2011, to $11.8 billion. This resulted in 5,000 fewer workers (60% of which were enforcement jobs), so an increase in auditing may not be very realistic.
Many of the workers that do remain actively enforcing tax compliance have been reassigned - to focus on the rise in identity theft fraud. Tax refunds associated with identity theft cases have increased 431% from 2010 to 2011. The IRS employees on these cases also answer taxpayer phone calls on Mondays during tax filing season to try and lower waiting times. The effect has been minimal – waiting times have actually risen 137% since 2007, to an average of 10 minutes. Additionally, these employees lack the required skills needed to handle complex identity theft tax fraud cases.
The current electronic screening process used to help identify tax fraud uses certain “tolerance levels”. These are determined by specific dollar values and other measures that the IRS has programmed into their computers. If a tax return’s data falls outside the tolerance level, it’s likely to be fraudulent and is then reviewed manually. Although it may seem like a streamlined process, a 2008 audit by the Treasury Inspector General for Tax Administration (which oversees the IRS), showed that the tolerance levels were not set by empirical data, nor were they evaluated for their effectiveness. Mark Matthews, IRS Deputy Commissioner for Services and Enforcement from 2003-2006, stated in an interview last month that some tolerance levels were indeed “picked by the seat of the pants.” Now, however, the IRS says tolerance level protocols are checked annually.
On top of the major budget cuts the IRS has experienced, the complex tax code increases difficulties for taxpayers, and in turn, the IRS. “If it’s harder for the taxpayer to fill out their return, it’s harder for us to verify it,” said IRS Deputy Commissioner Steven Miller. With a limited budget, it seems the IRS must pick and choose where they’d like to focus their attention and resources. With the rise in identity theft tax return fraud, the total number of audits may actually drop. In the past few years audits have been at about 1.1% – if they fall below 1% this year, it will be the first time since 2001-2006. Miller commented, “We may not be able to everything, but we’re going to ensure that we do what we have to do.”
Convey provides tax information reporting services and software to businesses to make IRS compliance clear and uncomplicated. U.S. federal tax advice contained in this web site is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this document. (iii) The taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.