THE Treasury Inspector General for Tax Administration (TIGTA, an agency that oversees the IRS) instructed the IRS to expand audits to prior and subsequent years. This means that if IRS audits your income tax return for 2011, they must expand the audit to your 2010 and 2012 as well. Ouch!
The Treasury Department conducted its own audit of the IRS to determine whether tax compliance officers conducted required filing checks in accordance with IRS policies and procedures.
TIGTA stated that IRS must make every effort to ensure that audits are expanded to prior year returns, as well as subsequent year returns, when “substantial” taxes may be involved.
TIGTA evaluated single-year audits of individual returns for which the taxpayers involved agreed they understated their tax liabilities by more than $4,400. Auditors scrutinized 100 such sample cases. Although similar tax issues may have existed on prior and/or subsequent year returns, the audits were not expanded to those returns in 48 of the 100 sample cases. As a consequence, opportunities may have been missed to address the noncompliance that contributes to the tax gap and promote tax system fairness among the vast majority of taxpayers who properly report and pay their taxes year in and year out.
IRS has estimated that $197 billion of the $345 billion tax gap is attributable to individuals underreporting their income tax liabilities.
TIGTA identified three factors why the IRS may not have expanded audits:
1. The agency “strives to keep its audit inventories free of old tax year returns.”
2. Tax compliance officers do not seem to be taking full advantage of available internal sources of information when conducting required filing checks.
3. There is inconsistent accountability regarding the quality of filing checks by tax compliance officers.
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Victor Santos Sy, CPA, MBA, provides professional services in accounting and tax controversy including IRS audit defense and offers in compromise. He also advises clients on choices of entity including corporations for small businesses and LLCs for rentals. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation at 704 Mira Monte Place, Pasadena, CA 91101. The firm celebrates its 35th anniversary this year. You may email tax questions to Vic at [email protected]. You are welcome to visit our website for more than 300 tax tips at www.victorsycpa.com.