There has been news about downsizing at the IRS—budget cuts, reduced personnel, and fewer audits and other compliance activities. What most people don’t realize is that the IRS is persisting in enforcing tax laws, and will do so in the years ahead. Here are nine facts that show why enforcement and compliance are IRS priorities:
- The tax gap is almost as much as the budget deficit.
The tax gap is the difference between what taxpayers pay and what is owed. Either taxpayers don’t file a return or they underreport their income. The gap is approximately $458 billion, and every 1% increase in compliance results in approximately $25 billion in revenue to the Treasury.
- The IRS spends the largest share of its budget on enforcement.
Congress appropriates approximately 39% of the total IRS budget to enforcement and 19% to taxpayer services. The IRS has launched an initiative to provide better service to taxpayers, and make more efficient use of its resources, but enforcement is still seen as its most important function.
- The IRS is doing more with less.
Reductions in the IRS budget have not affected collections revenue.
- The IRS knows that 7.5 million people don’t file their required returns every year, and 24 million forms 1040 don’t report all information statements on the return.
The IRS can match W2 and 1099 information returns filed to tax returns filed. About 7.5 million of these information returns are received by people who don’t file returns, and this doesn’t include workers who are paid cash.
- Nineteen million individuals and businesses owe $391 billion to the IRS.
One third of delinquent taxpayers are under active collection with the IRS, and another third have payment arrangements. More electronic features with ability to pay balances due have enhanced IRS’s ability to collect tax liabilities.
- The IRS audits only 0.8% of returns.
Seventy-five percent of the 1.3 million audits conducted by the IRS in 2015 were correspondence audits, which are mainly focused on protecting refunds for refundable credits. The other type of “audit” which can affect taxpayers is a CP2000 notice—an Automated Underreporter Notice. These notices result from a mismatch of reported income or deductions and the information the IRS has received via W2s and 1099s. Though not technically an audit, the result can be much the same with increased taxes, penalties, and interest.
- The IRS sends six times more notices per year than it did in 2001.
With a reduced staff, the IRS has found that mail “audits” can be completed in about an hour, while it takes 22 hours to conduct a field audit. In 2015, the IRS mail audit program examined almost one million tax returns. This is approximately 75% of all audits conducted.
- The IRS issues 40 million penalties to 27 million taxpayers every year.
Most penalties (56%) are assessed for failure to pay and underpaying estimated tax (30%). Accuracy related penalties are only about 2% of the total penalties, but the use of this penalty has increased about 948% over the last ten years. The IRS is very serious about compliance.
- Schedule C filers underreport their income by 57%.
This group of filers contributes the most to the tax gap every year. The IRS has contacted more small businesses through the automated matching program and instituted additional forms to gather information about credit card transactions. Any increase in the IRS enforcement budget is likely to be directed to these taxpayers.
The IRS will continue to improve its ability to contact more taxpayers to close the tax gap. Many taxpayers who use a tax professional to prepare their taxes have authorized the tax preparer to communicate with the IRS or solve other issues on their behalf. This is a year-around service that we provide to our clients.
Bottom line—we help yours grow!
This information is excerpted from an article by Jim Buttonow in the Journal of Accountancy newsletters dated February 6, 2017.
