WITH a bigger budget, IRS recently hired new personnel to increase their historic low audit rates.
Here are 7 targets for IRS audits:
1. Non-filers
IRS estimates that nonfilers represent $39 billion in lost revenue annually. To make even worse, nonfilers leave the tax system for good. The IRS has restarted its delinquent return investigation and hired more field resources to chase nonfilers
2. Taxpayers with refundable credits
IRS estimated that 24% of all earned income tax credit payments are erroneous. Some fraud. EITC and additional child tax credit refund hold audits continue to be the #1 IRS audit target. These are easy IRS audits as they are done by mail and taxpayers rarely contest the IRS’ findings.
3. Crypto-currency holders
There is no audit trail on crypto-currency. Transactions are not reported so gains are not taxed. There is no virtual currency information reporting (i.e. W-2s, 1099s). IRS began its scrutiny of taxpayers with virtual currency transactions in July 2019 with several notice and compliance programs. IRS promises more compliance efforts this year, including several criminal prosecutions for taxpayers who have intentionally not reported virtual currency gains.
4. Employers with unpaid payroll taxes
Two thirds of all tax revenue come from withheld payroll taxes. When employers don’t pay their payroll taxes, the US Treasury takes a double hit. First, the IRS does not get employees’ withheld income and social security taxes. Second, the IRS has to give credit to employees on their filed returns for the unpaid withholding. In other words, IRS is refunding withheld taxes that it never received.
Habitual taxpayers with patterns of delinquency pyramid unpaid payroll taxes using different entities.
5. Small business taxpayers
Taxpayers who do not receive information returns such as W-2s and 1099s do not file tax returns. They are the biggest causes of noncompliance. Small businesses are the biggest offenders. Unreported tax on small business income for individuals is estimated at more than $100 billion a year. IRS recently hired Revenue Agents to audit small businesses.
6. High tax debtors
IRS has lost almost half of its Revenue Officers from 2010 to 2018. Many high tax debt taxpayers were put on hold because the IRS simply did not have the resources to chase them. Newly hired and trained Revenue Officers will be visiting higher debt taxpayers to get them back into compliance.
7. High-income taxpayers
More IRS Revenue Agents will mean more audits on higher wealth taxpayers especially taxpayers who have foreign financial accounts and entities. In the past, high-income taxpayers have experienced audit rates as high as 12% (2011) – in 2018, the audit rate of high wealth taxpayers is 3.4%. Expect more high income audits due to IRS political pressure and The cost of auditing high income taxpayers has good return on investment to the tune of $115,000 per audit.
On hold (for now):
IRS does not have enough Revenue Agents to conduct complex audits of Employers who misclassify workers and S corporations and partnerships, but they’re coming soon under the Biden administration.
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Victor Santos Sy, MBA. CPA (Retired)
Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation.
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He retired after 50 years of defending taxpayers audited by the IRS, EDD, BOE and other governmental agencies. He published a book on “How to Avoid or Survive IRS Audits” that’s available at Amazon. Readers may email tax questions to [email protected].