IRS AUDITS
The IRS audit rate for individual returns filed in fiscal year (FY) 2010 was 1.1 percent, according to statistics released by the agency in 2011 (IR-2011-27). This represented approximately 1.6 million returns out of the approximately 143 million returns filed by individuals. The audit rate for individual returns with positive income of $1 million or more was 8.4 percent for FY 2010. The FY 2010 audit rate for small corporations (corporations with assets below $10 million) was 0.9 percent. The FY 2011 audit rate for large corporations was 16.6 percent.
The majority of individual audits in FY 2010 were correspondence audits. Nevertheless, a trend toward in-person audits for both individuals and businesses seems to be growing. The Treasury Inspector General for Tax Administration (TIGTA) reported in 2011 that the number of IRS revenue agents and tax compliance officers who conduct audits increased by four percent from FY 2009 to FY 2010. TIGTA also called for increased and more sophisticated audit strategies in connection with small businesses in which the noncompliance rate in some sectors is above 50 percent.
Collection Financial Standards
The IRS updated its collection financial standards in 2011. These are used in calculating repayment of delinquent taxes. National standards apply to food, clothing, health care, and certain other expenses. Local standards apply to housing, utilities and certain transportation costs.
Tax Liens
The IRS announced some taxpayer-friendly changes in its lien processes in 2011 (IR-2011-20). Liens will be withdrawn immediately upon a taxpayer's request once full payment of taxes is made. The IRS will also allow lien withdrawals for taxpayers entering into a direct debit installment agreement for payment of back taxes and will withdraw a lien if a taxpayer on a regular installment agreement converts to a direct debit agreement. Liens will be withdrawn after a probationary period demonstrating that direct debit payments will be made, the IRS explained.
The distinction between release of a tax lien and withdrawal of a tax lien is important to a taxpayer's credit worthiness, the National Taxpayer Advocate told Congress in 2011. A tax lien that is released generally continues to be reflected on the taxpayer's credit report. When a lien is withdrawn, it is generally removed from the taxpayer's credit report. According to the National Taxpayer Advocate, the number of liens filed by the IRS increased from 168,000 in fiscal year (FY) 1999 to more than one million in FY 2010.
HOW DO YOU REPORT SUSPECTED
TAX FRAUD ACTIVITY?
If you suspect or know of an individual or company that is not complying with the tax laws, you may report this activity by completing Form 3949-A. You may fill out Form 3949-A online, print it and mail it to:
Internal Revenue Service
Fresno, CA 93888
If you do not wish to use Form 3949-A, you may send a letter to the address above. Please include the following information, if available:
* Name and address of the person you are reporting
* The taxpayer identification number (social security number for an individual or employer identification number for a business)
* A brief description of the alleged violation, including how you became aware of or obtained the information
* The years involved
* The estimated dollar amount of any unreported income * Your name, address and daytime telephone number
Although you are not required to identify yourself, it is helpful to do so. Your identity can be kept confidential.
-----1.13 IRS Procedures: Reporting Fraud
IRS Offers New Penalty Relief and
Expanded Installment Agreements to Taxpayers under Expanded Fresh Start Initiative
IRS-2012-31, March 7, 2012
WASHINGTON — The Internal Revenue Service today announced a major expansion of its “Fresh Start” initiative to help struggling taxpayers by taking steps to provide new penalty relief to the unemployed and making Installment Agreements available to more people.
Under the new Fresh Start provisions, part of a broader effort started at the IRS in 2008, certain taxpayers who have been unemployed for 30 days or longer will be able to avoid failure-to-pay penalties. In addition, the IRS is doubling the dollar threshold for taxpayers eligible for Installment Agreements to help more people qualify for the program.
“We have an obligation to work with taxpayers who are struggling to make ends meet," said IRS Commissioner Doug Shulman. ”This new approach makes sense for taxpayers and for the nation’s tax system, and it’s part of a wider effort we have underway to help struggling taxpayers."
Penalty Relief
The IRS announced plans for new penalty relief for the unemployed on failure-to-pay penalties, which are one of the biggest factors a financially distressed taxpayer faces on a tax bill.
To assist those most in need, a six-month grace period on failure-to-pay penalties will be made available to certain wage earners and self-employed individuals. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by Oct. 15, 2012.
The penalty relief will be available to two categories of taxpayers:
• Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.
• Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.
This penalty relief is subject to income limits. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly or not exceed $100,000 if he or she files as single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.
Taxpayers meeting the eligibility criteria will need to complete a new Form 1127A to seek the 2011 penalty relief. The new form is available on IRS.gov.
The failure-to-pay penalty is generally half of 1 percent per month with an upper limit of 25 percent. Under this new relief, taxpayers can avoid that penalty until Oct. 15, 2012, which is six months beyond this year’s filing deadline. However, the IRS is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.
Even with the new penalty relief becoming available, the IRS strongly encourages taxpayers to file their returns on time by April 17 or file for an extension. Failure-to-file penalties applied to unpaid taxes remain in effect and are generally 5 percent per month, also with a 25 percent cap.
Offers in Compromise
Under the first round of Fresh Start, the IRS expanded a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers. An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.
The IRS recognizes that many taxpayers are still struggling to pay their bills so the agency has been working to put in place more common-sense changes to the OIC program to more closely reflect real-world situations.
For example, the IRS has more flexibility with financial analysis for determining reasonable collection potential for distressed taxpayers.
Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.
Details on IRS Collection and Other Information
A series of eight short videos are available to familiarize taxpayers and practitioners with the IRS collection process. The series “Owe Taxes? Understanding IRS Collection Efforts”, is available on the IRS website, www.irs.gov.
The IRS website has a variety of other online resources available to help taxpayers meet their payment obligations:
• IR-2011-20: IRS Announces New Effort to Help Struggling Taxpayers Get a Fresh Start; Major Changes to Lien Process
• Offer in Compromise
• Tax Tip: Ten Tips for Taxpayers Who Owe Money to the IRS
• The What If’s of an Economic Downturn
• Video on How to Complete Form 656: Offer in Compromise
For more information go to www.irs.gov or call us
