by steve | Jun 3, 2010 | IRS Tax Advice, Tax News
One of the questions Fresh Start Tax ( 866-700-1040 ) is asked the most is:
“How and why the IRS Selects Tax Returns for Audits?” Here is what the Internal Revenue Service reveals
FACTS: Did you know that:
* The IRS audits a total of 1,391,581 tax returns a year.
* The IRS field agents complete more than 310,000 audits by office or business visits a year.
*
The IRS completes over 1,081,152 correspondence audits a year.
IRS Policy Statement P-4-21. It states “The primary objective in selecting returns for examination is to promote the highest degree of voluntary compliance on the part of taxpayers”.
The examination plan
The plan that is used by the IRS is based on long range coverage planning, and objectives on the resources requested in the Congressional Budget. From this, there is an established plan where staff years are allocated to all area IRS offices using resource allocation and a prescribed methodology. Each Area Manager of the IRS is responsible for preparing an area response following instructions from the National Headquarters.
Staffing for the IRS audit
Staffing is based on the examination priorities that differ from office to office and region to region, front loaded programs set up before hand, historic examination rates adjusted to yield sure ended results and audits that match experience of the personnel.
Front loaded programs
Front Loaded programs are those audits that headquarters has determined are very important and a considerable amount of time must be spent on these programs and activities. Each area has discussions within management as to what the programs should be for each region, district, and office. Some of the programs are:
* Special enforcement programs – An example of this may be compliance of all flee market vendors. A program I was involved with.
* High Income non-filers – IRS would get their information from a match program of w-2’s and 1099’s and match up social security numbers against filed returns.
* Abusive Tax Avoidance – This could be in the area of offshore activities.
* Offshore credit card program
* National Research programs – Those set forth by management after doing a trends project.
The IRS makes sure there is balanced coverage.
The National Office makes sure there is a balance approach for audit return delivery and tax compliance. Resources and inventory and the size of personnel all go into this formula. The focus is blended into these areas:
1.
Individual returns less than $100,000.
2.
Individual returns greater than $100,000 but less than $200,000.
3.
Individual returns greater than $ 200,000.
4.
Small Business Corporations.
5.
Small Business Flow-Through Entities – S Corporations, Fiduciaries and Partnerships.
Classification Plan
The IRS will prepare a plan, which is classified. A National DIF score indicator is placed on all Federal Income tax returns that are filed. Each return has certain factors that contribute to its score such as Gross Income, Adjusted Gross Income and line item expense. There are several classified secrets that go into the DIF score.
A ratable ordering tool and guide are also available on the Exam Planning and Delivery Web site, .http://sbse.web.irs.gov/epd/
DIF Cutoff Score This is BIG STUFF
1.
The IRS will calculate the Area DIF cutoff score for each activity code, giving consideration to the selection rate. This is the lowest DIF score necessary to secure the number of returns required for audit. For example, if the return plan shows 225 returns for an activity code and the selection rate is 70%, the IRS will need to order 321 returns (225/70%). The DIF Cut off Score is 500. The number of returns with DIF scores greater than 550 is 280, which is less than the number of returns required, so the lowest DIF score on an ordered return will be in the range of 500 to 550 and the DIF cutoff score is 500. This is the IRS example as found in the IRS IRM section 4.
Where your case is worked
1.
Examination inventory is assigned to IRS offices based on ZIP codes, using the Look up Tables at Martinsburg Computing Center.
High Assault Risk Areas
1.
Certain ZIP code areas are identified as High Assault Risk Areas. There are special instructions the IRS has regarding these audits. These returns will be audited.
Survey of Examination Cases. The IRS can look over your case and close the case with an eyeball look.
1.
While cases should be selected and started in accordance with all guidelines, in a limited number of circumstances, there may be returns that appear in the “judgment of the examiner and manager” to warrant survey without taxpayer contact. That is to not even contact the taxpayer.
2.
Cases delivered to the IRS area manager will generally fall into one of three categories: mandatory work, strategic (priority program) work, and non-strategic work.
1.
Mandatory work includes nationally-coordinated research projects such as NRP and employee audits (excludes “new” IRS employee audits)
2.
Strategic work is identified annually in the Exam Program Letter which can be found at http://sbse.web.irs.gov/Exam/ . The procedures to survey strategic work and referrals from other business units, “new” employee audits and cases with previous taxpayer contact require an explanation for the rationale for the survey.
3.
Cases that are not mandatory work, strategic work, a referral from another business unit, and are not part of an employee examination or research study may be surveyed based upon the professional judgment of the examiner with concurrence of the immediate supervisor.
3.
Here are some factors to consider when determining whether to survey strategic work:
1.
Taxpayer is in bankruptcy
2.
Taxpayer has suffered an extreme hardship or illness
3.
Taxpayer is deceased, or
4.
Examiner has additional information that was not available during classification.
5. This is in the complete judgment of the IRS tax auditor.
From year to year the IRS changes their programs to keep everyone honest. However, after years of experience, a trained eye can know what tax returns will be pulled for audit.
Should you have any IRS needs, please call our professional staff made up of former IRS agents, to help solve your case.
1-866-700-1040
by steve | Jun 3, 2010 | IRS Tax Advice, Tax News
1.
The IRS will compare information, such as taxpayer income, expenses, etc., to information already on the IRS system of asset gathering. It is information gathered over the years through tax returns, 3 parties and levy sources.
2.
Full credit reports are required when conducting financial analysis and verification on the Large dollar Accounts, those over $100,000.00. In these cases, the IRS will do the following:
3.
Identify past residences and employers of the taxpayers. The IRS already has this information available.
Verify competing lien holders, balances due, and payment history of the taxpayer.
Identify indicators of potential assets not listed on the Collection Information Statement. The IRS also looks for badges of fraud.
Identify other creditors as lead for undisclosed assets.
4.
The IRS will also find out if you have given a financial statement to other 3 third parties and can summons for them as well.
5.
The IRS can Google your name and find out information about your case.
There may be instances when the balance due on an account in a Large Dollar Team is below the dollar amount for the above referenced LEM criteria; a full credit report may be considered to assist in locating taxpayer assets or as an aid in the verification of financial information prior to granting an Installment Agreement or closing as Unable to Pay.
6.
Secure pay stubs from all wage sources, only when necessary.
7.
Validate any unreasonable expenses to see if they should be included as necessary expenses.
8.
Verify and correct Form W-4 or estimated payments.
9.
Consider a withholding compliance referral for possible business accounts.
10.
If necessary, the IRS will secure banking records or other verification of income/expenses. Compare data to income and expense information provided by the taxpayer.
11.
Document the Account Management System in the case history and resolve all discrepancies. The IRS will continue to build an asset history on all taxpayers. Big Brother is watching.
12.
If proof of self employment income is required, secure proof for at least two months.
Invoices, bank statements, accounts receivable, commission statements,things of this sort, etc.
13.
Verify compliance with estimated tax payments and/or Federal Tax Deposit payments.
14.
Check to determine if the taxpayer previously defaulted on an Installment Agreement. If this is the case, the IRS will take a tougher approach.
15.
Strongly suggest use of a Payroll Deduction Installment Agreement or Direct Debit Installment Agreement.
16.
Advise taxpayers to submit voluntary payments if and whenever possible.
17.
If the taxpayer cannot full pay within the Collection Status Expiration Date, and does not meet Currently Not Collectible hardship criteria, follow Partial Pay Installment Agreement procedures.
18.
If unable to enter into an Installment Agreement, the IRS will refer to Installment Agreement rejection procedures and send the case out to a field agent.
Should you have any question, please call us at Fresh Start Tax today. 1-866-700-1040
by steve | Jun 3, 2010 | IRS Tax Advice, Tax News
Internal Revenue Service will pre-screening all potential Non-filers Badges of Fraud
1.
On the initial screening of a non-filer case, the IRS compliance employee must determine if the facts indicate potential fraud. Indicators of fraud to be considered. some of the Fraud indicators are as follows:
*
History of non-filing or late filing and an apparent ability to pay;
This indicator of fraud is insufficient support for assertion of the FFTF penalty when not in combination with any of the other fraud indicators listed below.
*
Repeated contacts by the Internal Revenue Service;
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Knowledge of the filing requirements such as advanced education (college), business (especially tax) experience, record of previous filing etc.);
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Failure to reveal or attempts to conceal assets;
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Age and occupation of the taxpayer;
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Substantial tax liability after withholding credits and estimated tax payments;
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Large number of cash transactions , payment of personal and business expenses in cash when cash payment is unusual and/or the cashing (as opposed to the deposit) of business receipts;
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Indications of significant income per Information Return Processing or Taxpayer Delinquency Investigation documents substantial interest and dividends earned, investments in IRA accounts, stock and bond transactions, high mortgage interest paid);
Consideration should be given to any allowable expenses the taxpayer may have to offset self-employment income.
*
Refuses or is unable to explain the failure to file;
*
Experience of the taxpayer in tax matters such as a law professor, financial sector experience ,CPA or tax attorney; and,
*
Prior history of criminal tax prosecutions for Title 26 violations.
2.
If indications of fraud exist, the IRS compliance employee will discuss the case with the group manager. If the group manager concurs that the possibility of fraud exists, the fraud technical advisor will be contacted. Whenever feasible, a meeting will be held between the compliance employee, group manager and FTA to discuss the need for fraud development.Thre individuals are usually involved in this process.
3.
If the possibility of fraud exists:IRS will not
1.
DO NOT SOLICIT tax returns. If returns are submitted, they should be accepted.
2.
DO NOT VOLUNTEER ADVICE to the taxpayer concerning any course of action he/she should follow.
3.
DO NOT DISCUSS tax liabilities, penalties, fraud, or criminal referral possibilities with the taxpayer.
by steve | Jun 3, 2010 | IRS Tax Advice, Tax News
Development of Fraud Case by the Internal Revenue Service Key Question IRS will ask
1.
The following actions should assist the IRS employee in establishing affirmative acts of tax fraud:
1.
Interview the taxpayer to determine the reason or the intent of the taxpayers noncompliance.
2.
Ask sufficient questions to determine the extent of the delinquency, including the periods and tax due.
3.
Document verbatim, if possible, the questions asked and the taxpayers response or lack of response.
4.
Identify any personal reasons that could affect the taxpayers ability to comply.
5.
Attempt to get a definitive statement from the taxpayer regarding additional expenses not listed in the books and records. These expenses could include, but are not limited to, expenses paid in cash or “under-the-table ” payments to employees.Good luck.
6.
Attempt to establish year-end cash on hand for each year under investigation.
2.
Verify income from all available sources. Methods of income verification include, but are not limited to:
1.
Currency, Banking, and Retrieval System Information
2.
Information Data Retrieval System on the IRS’s own internal system
3.
Securing copies of Forms W?2 from employers and Forms 1099 from customers. IRS has on file the records for the past 7 years
4.
Securing copies of checks issued to the taxpayer from Form 1099 issuer(s);
5.
Examining the taxpayers books and records of income and expenses;
6.
Reviewing the last return filed. This will assist in identifying income sources as well as deductions and exemptions used in tax computations; and
7.
Securing current financial information including a check of public records for assets, and a physical observation of the taxpayers residence, place of business and/or other identified properties. This information will be used to determine whether the taxpayer had the ability to pay the taxes owed when the return(s) was required to be filed.
3.
IRS will access to a full credit report is governed by the Fair Credit Reporting Act (Act). The IRS will pull up credit reports from all the agencies and do a full check on financial applications given to third parties. since most individuals tend to spike up their financial information, it is a great source of information to the IRS Agent.
by steve | Jun 2, 2010 | IRS Tax Advice, Tax News
Taxpayer Advocate Service is an independent organization within the IRS, that help taxpayers resolve their tax problems with the IRS and recommend changes that will prevent the problems.in the future
Here are eight things things every taxpayer should know about Taxpayer Advocates Office
1. Taxpayer Advocate Office is your voice at the Internal Revenue Service.
2. The service is free, confidential, and tailored to meet your needs.on your particular case.
3. You may be eligible for TAS help only if you have tried to resolve your back tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just is not working as it should.You must have tried working through your problem and have has documented proof.
4. TAS helps taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. This includes businesses as well as individuals.They take all cases that cannot be resolved except for criminal activity.
5. TAS employees know the IRS and how to navigate though the maze of red tape . They will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved.
6. TAS has at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. You can call your local advocate, whose number is in your phone book, in Publication 1546, Taxpayer Advocate Service.
7. You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www.taxtoolkit.irs.gov .
8.It is best to use a tax professional who has worked thousands of these cases because they know the short cuts and administrative procedure to get the case resolved quickly. When a tax professional works with TAS expect results fast.
by steve | Jun 2, 2010 | IRS Tax Advice, Tax News
Overview of the Estate Tax Lien
1.
Before the Federal Government files a federal tax lien on an estate tax case, the IRS gives careful thought to the advantages and limitations of each type of estate tax lien.
2.
In many cases, the general lien is the best tool to protect the federal government’s interest. The Federal Estate Tax Lien is automatically created when any resident of the United States dies. No recorded notice is required for it to become effective. It attaches to all of the assets that are part of the decedent’s gross estate and are required to be reported on Form 706, United States Estate Tax Return, and is security for any estate taxes that may be determined to be due. If a probate asset is transferred or liquidated without payment of the tax, but for the exceptions detailed at IRM of the Internal Revenue Manual, the federal estate tax lien continues to attach to the asset. If a non-probate asset is transferred or liquidated without payment of the tax, a liability equal to the value of the asset at the time of the decedent’s death becomes due from the transferee. A separate assessment against the transferee is not needed. Assets of the gross estate can be sold or encumbered free of lien if the proceeds from the sale or loan are used for the payment of charges against the estate or expenses of its administration that are allowed by any court having jurisdiction.
3.
A limitation of the general federal estate tax lien is that it has an absolute life of 10 years. It cannot be extended. Estate tax attributable to an estate’s interest in a closely held business may be paid over a 14-year period if an extension of time to pay under IRC is in effect which could potentially leave the Service without lien protection for four years if a notice of lien is not recorded before the 10 years have elapsed.
4.
The filing of Form 668-J will secure the deferred taxes for the duration of the extension. The collection statute of limitations is suspended during the period of the extension.
1.
The federal estate tax lien attaches only the property specified on the recorded lien. A lien on property with equivalent value can be substituted for the actual property upon agreement between the Internal Revenue Service and all parties with an interest in the property.
2.
When estate property is listed on the recorded IRS Form 668-J, it is automatically released from the effects of the general estate tax lien.
3. Find the closest Estate and gift Unit of the Internal Revenue Service and they should be able to help you with these issues.
Requesting a Release, Discharge of Property From, or Subordination of Unrecorded Federal Estate Tax Lien
1.
Releasing the Estate Tax Lien Occasionally, the IRS office receives requests for release of the unrecorded estate tax lien. However, just as there is no provision for recording a notice of the unrecorded estate tax lien, there is no provision for recording a release. Individuals are instructed to provide documentation to potential purchasers of the decedent’s property that either there was no Form 706 filing requirement, or, if Form 706 was filed and a closing letter has been provided to the estate by Estate & Gift Tax and a copy of the return, the Estate Tax Closing Letter 627 , and verification of payment, are evidence that the federal estate tax lien has been satisfied.
2.
Discharge of the Estate Tax Lien
1.
Those individuals looking for discharge under are usually submitted on Form 4422, Application for Certificate Discharging Property Subject to Estate Tax Lien. These applications will be processed by Estate and Gift division of IRS. If Form 706 has not been filed or if a closing letter has not been issued. If Form 706 has been filed and a closing letter has been issued, applications for discharge will be processed by Advisory Unit of IRS , United States Certificate Discharging Property Subject to Estate Tax Lien, is used to discharge the property.
2.
Applications for discharge will be processed by Advisory Unit in the local office. If Form 706 has not been filed or if a closing letter has not been issued, Advisory will consult with Estate and Gift division in order to determine the government’s lien interest.
3.
Subordination of the Estate Tax Lien Individuals looking for a subordination will be processed by the Local Advisory Unit. If Form 706 has not been filed or if a closing letter has not been issued, Advisory Unit will consult with the Estate and Gift Division in order to determine the government’s lien interest.
The Federal Gift Tax Lien
1.
The provisions of the federal gift tax lien are also delineated in IRC and parallel those for the general estate tax lien. ( Same as above )
2.
The special gift tax lien imposed attaches to all gifts made during the calendar year for the amount of the gift tax imposed upon the gifts made during such year. If the gift tax is not paid by the donor when due, the donee of any gift becomes personally liable for the tax to the extent of the value of the gift. The gift tax lien extends for a period of ten years from the time the gifts were made or until or the tax is paid, whichever date is sooner.
Should you have any questions about any of these issues, call the Fresh Start Tax professionals at 1.866.700.1040
