Make room in your rolodex for your friendly IRS agent.

Posted on December 7, 2010

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President Obama submitted a $12.6 billion budget for the IRS in Feb which included almost $300 million more than the IRS requested for IRS enforcement programs.  The IRS budget request without the Obama increase included hiring 800 new IRS agents.  Then in July after congress passed ObamaCare the IRS got the added duty of audits to determine who has the insurance “as required by law” and they have to collect the penalties from Americans who don’t.  ObamaCare also might be called  the accountants full employment act because starting for payments made in 2012 every farm and business will have to give a 1099 to anyone they spend over $600 with for any type of purchase.  For example, if you buy $600 of office supplies in a year from Wal Mart you will need to call the home office of Wal Mart and ask them for their federal ID number so you can give them a 1099.  Oh how accountants love congress.  I probably should have sent Obama, Reed and Pelosi a Christmas card….maybe next year. 

So just what is the IRS doing with all that additional money for enforcement?  Statistics released in August showed a smaller percentage of their audits result in no change to the tax return.  That means when they come knocking you will most likely get to open your checkbook.  They are also doing more exams by mail because they find there are certain deductions people seem to stretch the truth on including: vehicle expense, meals & entertainment, charity, earned income credit and home buyer credits.  If you have large deductions in those areas you can expect a “valentine” from the IRS so watch your mail.  Another area where the IRS is making GOOD use of your money is audits of small business.  Syracuse University found the hours IRS spends on small business audits is up 30% in the last five years while the audits of large corporations is down.  Not sure who was the genius at the IRS who came up with this plan because the amount the IRS collects per audit hour is much higher when auditing large corporations.  Other unique areas the IRS is targeting include hiring outside contractors to help them identify restaurants who are not reporting tips and monitoring real estate sales to make sure if you sell your house you repay the homebuyer tax credit.

 To help their auditors find unreported income the IRS published a new audit guide for cash audit techniques.  They are especially interested in beauty shops, car washes, coin operated machines, convenience stores, bail bonds and any type of business with the potential to handle cash.  The IRS has also found there are lots of people who pay more in mortgage interest than the income they report would show they could afford.  Talk about the obvious, 25% of all mortgage holders today owe more than their home is worth.  Wonder if anyone told the IRS we were in a recession??????

One of the biggest targets of the IRS is employers who treat employees as independent contractors.  In Feb 2010 the IRS began a test of 6,000 payroll audits.  In addition, some of the national tax franchises are encouraging individuals to send IRS a form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes if the individual got a 1099 instead of a W-2.  The IRS then follows up and in most cases they send out a deficiency notice with no mention of any rights to appeal.  If the employer does not fight these cases they not only owe the additional tax but have potential problems with workers comp and retirement plans.  The Obama budget included $25 million for the Department of Labor to work together with the IRS to locate these cases and they project this initiative will collect an additional $7 billion in tax.  The states are also targeting this area doing things like sending questionnaires to those who file taxes as independent contractors, requiring independent contractors to apply for an exemption certificate before they can work on construction jobs, etc.  Even congress jumped on this bandwagon looking for additional taxes.  One representative introduced a bill that would clarify the definition of a contractor and increase the penalties for misclassifying employees saying “This will level the field for companies playing by the rules.”  Also, starting in 2011 rental property owners need to file 1099s for all subcontractors they use in their rental business.  

Then there are the IRS audits of the high income taxpayers.  The IRS audited one of every 16 returns for those making over $200,000.  Last fall the IRS created the Global High Wealth Industry Group to target audits of high income individuals and the companies they own.  These audits will be as much fun as a root canal.  The document requests target 47 areas of special interest. 

Just so you don’t run out of things to worry about, you should know IRS recently found problems in 401k plans and is also targeting charities with employment audits and looking at their fund raising costs.

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