With a smaller budget and fewer employees, the Internal Revenue Service may conduct fewer audits this year.
But don’t start celebrating just yet.
A smaller number of audits means a drop in federal revenue, as more tax cheats get a free pass. A lean IRS staff translates into less help for taxpayers seeking assistance at the same time the agency is dealing with exploding identity theft and complex changes in tax law.
If all the nonfilers and dishonest filers paid their due, perhaps tax rates could be lowered for everyone and still generate the revenue needed to run the government, according to Nina E. Olson, National Taxpayer Advocate, head of an independent organization within the IRS that represents taxpayer concerns.
It means “honest” taxpayers essentially pay a surcharge to keep revenue even, Olson said.
This season’s budget cuts left the IRS with 5,000 fewer workers than it had in 2011, according to a Treasury Department employees group.
In her most recent report, Olson wrote that cutbacks at the IRS make it impossible for the agency to adequately deal with fraud and noncompliance and render it unable to “meet the service needs of the taxpaying public.”
Stressed resources are hurting taxpayers seeking advice as the Tuesday filing deadline approaches. “Taxpayers seeking help by phone are waiting on hold for as long an hour, and every day there are very long lines of people waiting at Taxpayer Assistance Centers around the country,” Colleen M. Kelley, president of the National Treasury Employees Union, which represents workers at the IRS, said in a statement last week.
Retired IRS agent A. Jack Fishman said he recently attended a party for a fellow retiree and said the talk of the group was the low level of staffing at the agency. “They’re losing their experienced people,” he said. Fishman, an Atlanta resident, now represents taxpayers in disputes with the IRS.
With fewer employees to flag possible audits, those disputes may be fewer in number this year, but they will be no less unnerving for those who experience them.
“I felt like my world was coming to an end,” said Scottdale resident Jacki Mooney, who received a letter several years ago saying she owed the government $100,000. “I wondered if I would have to lose everything.”
Mooney, an unemployed AutoCad drafter, said the matter arose as the result of a divorce and said it was resolved for $800 — plus $4,000 in attorney’s fees.
‘90 to 120 DAYS’
When the IRS seeks a correction, Atlanta tax preparer Bill Nemeth typically files an amended return. The time frame for a response from the federal government is “stretching,” Nemeth said. “Typically we expect a response in 60 days. Now it’s more like 90 to 120 days.”
Some preparers also have complained about wait times in the state. The number of state Revenue Department personnel dropped in 2010, but much of that shortfall has been replaced, said Commissioner Douglas J. MacGinnitie. The state hired “150 or so” in the past year, focusing on compliance, audits and fraud, MacGinnitie said.
This spring the state hired an additional 300 temporary workers to deal with the 2012 tax season.
The recession and its epidemic of foreclosures and job loss has made this tax season even more complicated for many, who won’t know whether to file even if they’ve been unemployed for the year.
Taxpayers should know that unemployment insurance is counted as income, and in many cases they need to file, even if they don’t owe taxes. Being poor won’t shield you from the IRS’s attention, said Phillip Bright of Jonesboro, an unemployed brake press operator, laid off from his work in the aircraft manufacturing business.
FRAUD INCREASES
A growing challenge for state and federal revenue departments is the explosion in tax refund fraud. Scam artists acquire names and Social Security numbers, file fake returns electronically and seek illegal refunds. “Last year we blocked $75 million worth of fraudulent returns,” said MacGinnitie, adding that this year an automated system will help block even more.
IRS computers detect possible fraud by comparing a host of numbers in each return with certain standards. For example, “at certain income levels they expect certain deductions,” said Todd Bensley, a managing director of tax and business consulting firm UHY Advisors. “If it’s skewed one way or the other you might get flagged.”
Mathematical errors, failure to file certain forms, undisclosed income, all will cause the same result. A return is “kicked out” and becomes the subject of closer scrutiny.
There are also “hot-button” issues that will attract attention, issues that change from year to year.
Bensley said this year self-employed workers filing Schedule C forms are attracting more second glances.
'RED FLAGS' THAT MAY TRIGGER AN AUDIT
According to several CPAs and tax advisers, returns marked with these “red flags” are more likely to attract an audit:
• Unreported income: “If the forms [received from employers and financial institutions] are not matching up to what’s being reported, if you have unreported income, you might get pulled and audited because of that,” said Todd Bensley, a managing director of tax and business consulting firm UHY Advisors.
• An artificially low salary: Certain closely held corporate entities allow executives to elect to receive compensation in a form other than salary. That’s acceptable within limits, Bensley said. Going beyond those limits triggers warning signs.
• Higher salaries: The audit rate increases from about 1.1 percent of tax returns to 3.9 percent among those earning above $200,000, according to Kiplingers magazine. And one in eight individuals making $1 million or more were audited.
• Being self-employed: “If there is a Schedule C in your tax return, odds are much higher that you will be audited,” said retired IRS agent A. Jack Fishman.
• Exceedingly generous charitable contributions: The IRS has calculated the usual charitable contributions at every income range, said Atlanta tax expert Stephen Gross, founder of HLB Gross Collins. “If your return is outside those normal ranges, that will be a red flag.”
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