The IRS is turning up the heat on taxpayers. Some of them, anyway.
The number of audits conducted by the Internal Revenue Service has dropped as it continues to reel from years of budget cuts. But even as its workforce shrinks, the agency must keep the money flowing into the U.S. Treasury. The solution in 2017? Focus on target-rich environments, and squeeze more dollars out of each audit.
That means more scrutiny of people and companies who are likeliest to hide money or under-report their tax burden. Tax specialists are warning clients, especially if they’re wealthy or have complicated tax situations, to be ready to hand over a lot more information. “My clients are concerned,” said Debra Estrem, managing director of the tax controversy group at Deloitte LLP.
The IRS has revealed only a few details about its plan of attack—too much information can give tax evaders clues, after all. But as head of the Deloitte division overseeing responses to hundreds of large, complex audits every year, Estrem has a better idea than most about what the IRS is up to.
While the IRS launches fewer full-blown audits, she noticed the agency sending out more “mass notices” addressing specific issues. For example, if you reported an especially large charitable contribution on your 1040 form, IRS computers may send you an automated notice asking for proof.
Her list of the IRS’s “favorite issues” is a long one: In addition to charitable contributions, she’s seen more notices about large losses, mortgage interest deductions, and 529 college savings plans. So-called “hobby losses” are a frequent IRS target. That’s when people claim “losses” for business ventures that, in the IRS’s eyes, were never meant to make a profit. Think of otherwise wealthy people claiming losses for musical groups, raising horses, racing cars or yachts, and even dog grooming, and you’ll get the picture.
“Audit lite”
That notice in the mail is a sort of “audit lite,” Estrem said. Provide solid substantiation of your credit or deduction—such as a business plan for your alleged hobby—and the IRS may then leave you alone. If not, expect to hear from an agent. “The best practice is to respond promptly and thoroughly, so it will hopefully end there,” she said.Sure, any taxpayer with a suspicious-looking charitable donation may get some additional mail from the IRS. But the clues Estrem cites all point to the new reality of this year’s tax season: The agency’s real firepower is now being aimed at the ultra-wealthy and large companies.
For several years, the IRS has been running a “Wealth Squad,” formally known as the Global High Wealth Industry Group, comprising a group of agents specially trained to pore over the finances of the very rich. They don’t just examine a loaded person’s 1040, but also any companies or investments he or she owns.
Even as the IRS workforce has shrunk in recent years, the agency has found other ways to get aggressive. Along with other federal agencies, it has forced banks in tax havens such as Switzerland to disclose more about Americans’ investments, and it’s tried harder to connect the dots between rich individuals and their sometimes-vast networks of global wealth.
Now the IRS has a strategy focused on large companies and the very wealthy people who own them. The Large Business and International Division, which includes the Wealth Squad, announced in January that it is launching 13 new “campaigns” focusing on particular areas in which the IRS suspects it can bring in additional revenue.