IRS Gets Tougher, Even as It Tries to Be More Taxpayer-friendly
April 18, 2011 (The Kansas City Star, Mo.) For most taxpayers still polishing their returns, these final hours before tonight's filing deadline are a time to review receipts, pore over forms and add up the numbers.
But for others, the time will be spent altering documents, forging signatures, maybe even moving money between offshore accounts in an effort to cheat Uncle Sam out of tax revenue. By some estimates, tax evasion is costing the federal government about $300 billion annually.
With so much money unaccounted for, the Internal Revenue Service -- despite its recent public efforts to be friendlier and more responsive to the average taxpayer -- is in no mood to back down from those trying to game the system.
Indeed, the agency has ratcheted up enforcement in a big way, hiring more investigators and often calling in its elite squad of forensics experts to conduct ink and handwriting analyses to crack a case.
"Over the last four or five years, the IRS has gotten tougher," said Julie Welch, a tax partner with Meara Welch Browne PC in Kansas City and co-author of "101 Tax Saving Ideas."
According to IRS data, individual tax audits were up about 10 percent overall in the fiscal year 2010 that ended Sept. 30, or about 1.1 percent of the total returns filed.
The audit percentages are even higher involving wealthy Americans earning $5 million to $10 million. Their review rate rose to 11.6 percent last year from 7.5 percent the year before. Those earning $10 million and up are audited even more frequently.
At the same time, criminal investigations launched by federal tax agents increased to 4,706 in fiscal 2010, at least a 15-year high based on a review of IRS records back to 1995.
The overall bottom line: Through its enforcement efforts last year, the IRS collected about $58 billion, compared with about $30 billion in 2000.
Tax fraud has become more sophisticated and complex because of computer technology, electronic filing of returns and direct-deposit options for refunds, said John Nunez, public information officer for the IRS criminal division in Omaha, Neb. His region includes Kansas and Missouri.
The IRS drew the battle lines tighter several years ago, pledging to beef up audits and target more criminal and civil investigations on the wealthy. At the same time, the agency has launched several programs to improve service and customer satisfaction, including advisory panels to listen to taxpayer complaints.
For most taxpayers, audits represent the first and only level of enforcement they'll ever deal with. About 75 percent of all individual audits are "correspondence" reviews in which the IRS and taxpayers resolve differences through the mail.
Common audit triggers include misinterpreting a tax credit, listing employee business expenses, forgetting to note interest in a bank account and reporting heavy amounts of charitable contributions or medical deductions. Many are simply innocent mistakes that can be explained with adequate documentation in a letter. The result is an underpayment penalty rather than jail time.
Returns that require a closer look can result in field audits, in which an agent comes to a house or business, or the dreaded office audits, which require face-to-face meetings at an IRS office. But again, if claims can be substantiated, common sense usually prevails with a check written to the federal government.
"It starts with an audit and it usually ends with it," said Jackie Perlman, principal research analyst with the Tax Institute of H&R Block in Kansas City.
But last year, of the 4,706 IRS criminal investigations that were opened, 2,645 resulted in indictments -- and of those, 1,770 were sentenced. That compares with about 3,700 investigations in 1995 that resulted in 2,252 indictments and 1,840 sentencings.
Several factors are behind the increase in criminal investigations. For one thing, Americans who may have been hiding money in Swiss and other foreign bank accounts have come under more scrutiny since 2009.
Earlier this year, the IRS offered a partial amnesty program to taxpayers with unreported money in offshore accounts. Taxpayers who voluntarily disclose their account information by the end of August won't face fines or jail time as high as normally could be expected. In a similar program in 2009, thousands of taxpayers voluntarily disclosed their offshore accounts.
The increase in criminal activity can also be attributed to the rough economy of the last few years, as some people failed to report cash income or took aggressive moves to claim more deductions. In some situations, people falsified tax returns to fraudulently obtain home mortgages, said Nunez of the IRS.
According to Nunez, some anti-government, anti-tax citizens still refuse to pay income taxes on the grounds that the income tax system is illegal or some other form of protest. The IRS has a 60-page document, "The Truth About Frivolous Tax Arguments," that outlines these situations and potential fines and criminal penalties.
When the government goes after tax evaders, it gets convictions more than 80 percent of the time.
While the IRS has convicted famous tax evaders such as actor Wesley Snipes and hotel operator Leona Helmsley, most are ordinary taxpayers from all walks of life, IRS officials said.
The IRS makes mistakes, too. A federal inspector general report released Friday indicated that the IRS paid out more than half a billion dollars in homeowner tax credits to people who probably didn't qualify under the popular program.
If you are questioned by the IRS, the best advice to avoid trouble on taxes -- besides being honest -- is to keep good records and to "have a legal basis so you know what you're doing," said Perlman.
IRS Publications 552 and 583 provide ample information on recordkeeping requirements, she said.
"Don't be afraid of being audited," Perlman said. "But be prepared for one."
Finally, don't ignore any correspondence from the tax man.
"The IRS will work with you, but they want to hear from you," Perlman said. "They do not want to be ignored."