A Look Back at 2012 and a Preview of 2013 Tax Tip of the Week | No. 199

IRS Practice and Procedure ChangesIn 2012, a $305 million IRS budget reduction resulted in $5 billion less in enforcement revenue.On January 6, 2012, the IRS announced the results of its most recent measurement of annual losses to the U.S. Treasury due to taxpayer noncompliance, also known as the tax gap. This study reflected the IRS’ estimates of noncompliance for tax year 2006. The IRS’ conclusion: In only five years, the tax gap increased from $345 billion in 2001 to $450 billion in 2006. In 2012, the IRS implemented new programs and made changes to its procedures to try to close the tax gap. But budget cuts also meant that the IRS had to conduct compliance activity with $305 million less. The result was $5 billion less in revenue from enforcement activities.Despite budget challenges, the IRS expanded some programs and improved others. Here are some of the most significant changes in IRS compliance that took place in 2012 – and a look ahead at what to expect in 2013.ExaminationsIn 2012, the IRS continued to focus on correspondence (mail) examinations, which contributed to an overall audit coverage rate of slightly more than 1% for individual taxpayers. This rate dropped slightly in 2012 due to a reduction in examination personnel. The IRS will continue to focus on Schedule A deductions and tax credits in these examinations.In 2012, the IRS started to focus closely on flow-through entities, and increased field examinations of partnerships and S corporations by 18.7%. In 2013, the IRS will focus on partnerships, looking closely at abusive transactions and underreported income, and on S corporations, looking closely at officer compensation and losses taken in excess of basis. IRS field agents will also continue to investigate small businesses, including e-commerce, for underreported income in 2013.In 2012, the IRS emphasized accuracy-related penalty assessments and held preparers responsible for return errors and omissions, especially in areas of rental property and deducting S corporation losses in excess of basis. This trend will continue in 2013.PenaltiesIn 2012, the IRS continued to pursue penalties to deter noncompliance. Since 2005, accuracy-related penalties assessed against individual taxpayers have increased 757%. In 2013, the IRS will continue to press for accuracy-related penalties in CP2000 underreported adjustments and audits.For 2011 individual returns, the IRS provided a six-month grace period for unemployed and self-employed taxpayers who experienced a significant reduction in income. For certain taxpayers who filed Form 1127-A, this grace period allowed an extension of time to pay, without penalty, until Oct. 15, 2012. The IRS has not extended this provision for 2012 returns.In 2012, the Treasury Inspector General for Tax Administration (TIGTA) criticized the IRS about what TIGTA described as a lack of uniformity in applying penalty abatement, and specifically criticized the IRS for not facilitating access to the first-time abatement relief option for failure to file, failure to pay, and failure to deposit penalties. First-time abatement is an administrative waiver that many taxpayers qualify for, but that the IRS does not readily publicize and that practitioners often don’t understand or request. In 2013, look for more pressure on the IRS to provide a form to simplify the process of requesting all types of penalty abatement.CollectionIn 2012, the IRS instituted additional Fresh Start initiatives to help struggling taxpayers pay their taxes. As part of these initiatives, the IRS relaxed streamlined installment agreement rules for individuals by increasing the threshold from $25,000 to $50,000, and the time to pay from 60 months to 72 months. The IRS also increased the qualifying amount for business trust fund express installment agreements from $10,000 to $25,000 to help businesses pay employment taxes and avoid the filing of a federal tax lien.In 2012, the IRS made significant changes to its offer in compromise (OIC) program terms to provide more access to the program. The IRS revised the future income calculation and made changes to allow taxpayers more expenses in determining the offer amount. In 2012, these changes allowed many more taxpayers to qualify for and receive an OIC.Installment agreement and OIC changes in 2012 were part of a multiyear effort by the IRS to help struggling taxpayers with better payment alternatives. In 2013, we will likely continue to see a kinder, gentler IRS in regard to payment alternatives.IRS Matching Programs2012 was a breakthrough year for IRS automated matching programs. In 2012, it’s likely that the IRS exceeded the 4.7 million individual CP2000 (underreported) notices that it sent in 2011. In 2012, this was the only major IRS compliance program that generated increased enforcement revenue over 2011. However, the IRS was not limited to information matching on individual returns.In 2012, the IRS initiated a business information-matching program and a Form 1099-K matching program. The IRS sent new notices in late 2012 questioning businesses on the accuracy of their returns, based on information statements filed under business employer identification numbers (EINs). The IRS also matched Forms 1099-K to business returns and sent inquiries to taxpayers with potential discrepancies, requesting explanations for possible unreported income.Editor’s Note:  We are seeing a huge increase in correspondence audits in our office.  Two key things to remember:  most of the notices are incorrect and most importantly bring the notice to us quickly!The IRS may get more aggressive, but they have to play by the rules.  We are here to make sure the rules work for you.As always, give us a call with any questions or concerns you may have.You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.Rick Prewitt - the guy behind TTW...until next week.