Small Business Taxes & ManagementTM--Copyright 2013, A/N Group, Inc.
Daniel Werfel, the Principal Deputy Commissioner of the IRS recently testified before the House Small Business Committee on the IRS and small businesses. Werfel started his testimony with describing some of the steps the IRS has taken to help and service small business taxpayers including the availability of a toll-free phone line dedicated to small business, corporations, partnerships and trusts with a separate line for practitioners.
Werfel went on to discuss the IRS enforcement program. He noted that as a result of budget cuts full-time staffing has declined by more than 8 percent over the last two years, and staffing for key enforcement occupations fell nearly 6 percent in the past year. In 2013, the IRS absorbed an additional $618-million reduction in its budget due to sequestration, which will have further negative impacts on IRS performance, including performance in enforcement programs.
In FY 2012, the IRS audited approximately 1.65 million returns, of which 21 percent were small business returns. For FY 2011 the percentage was 22 percent, and for FY 2010, 21 percent. This group includes filers of Schedule C and Schedule F, along with small corporations, S corporations and partnerships. The 2012 small business audit rate equates to only 0.2 percent of all returns filed, and 1.3 percent of small business returns filed.
Werfel said in conducting its examination program, the IRS uses a variety of techniques to focus exam resources on the areas of greatest compliance risk. As returns are processed, a majority of them are scored by a computer program for compliance risk, with a higher score indicating a higher probability that a change will be recommended during an examination. While the computer score is the most frequent reason for selecting a return for examination, there are other reasons a return may be selected. These include the need to reconcile what is reported on a taxpayer's return with third-party information provided on forms such as W-2s or 1099s.
In addition, a small business may be randomly selected for audit under the National Research Program. The results from examinations conducted under this program are used for research purposes. The information gained from these audits helps the IRS improve our audit selection criteria and update our estimates of the tax gap, which is the amount of taxes owed but not paid on time.
The type of audit a taxpayer may undergo depends on the number and complexity of issues involved. A single issue questioned on a return will generally give rise to a correspondence audit, while multiple issues will likely result in a face-to-face exam.
For all exams, the average additional tax recommended in FY 2012 was $23,345. Within that total, the average additional tax recommended for self-employed individuals was $11,880 and for small corporations, $28,988. For all taxpayers, the average cost to the IRS of a correspondence exam in FY 2012 was $400, compared with $324 in FY 2010. The average cost of a field exam to the IRS in FY 2012 was $6,232, down from $7,248 in FY 2010.
In going about our work in the enforcement area, Werfel said the IRS realizes that many small businesses face substantial economic challenges, even as the economy recovers. We have worked diligently to communicate to our employees the importance of recognizing that individual taxpayers and businesses being audited may be dealing with financial hardships, and we have encouraged our employees to be flexible in these situations.
Increasing our employees' flexibility allows them to respond appropriately to taxpayers with financial troubles. For that reason, we will continue to make sure that our employees have the guidance and the discretion they need to assist small businesses with the service they need and deserve.
One major example of our efforts to help individuals and small business owners in this regard is the Fresh Start initiative, which began in 2011. Under this initiative, the IRS has increased flexibility in its collection program to help taxpayers who are struggling financially. For example, we made it easier for taxpayers to obtain lien withdrawals after paying back taxes owed, and allowed liens to be withdrawn when a taxpayer signs a Direct Debit Installment Agreement (DDIA). Another provision helps more small businesses get access to Installment Agreements if they sign up for a DDIA and have less than $25,000 in unpaid taxes. We also changed our rules for Offers in Compromise (OIC) so that more taxpayers could qualify for a streamlined OIC.
We have continued to refine the Fresh Start initiative, and further increased flexibility in our collection program in 2012. This includes easing failure-to-pay penalties for unemployed taxpayers, and expanding our Allowable Living Expenses (ALE) standard. The standard is used to provide taxpayers a fair and consistent amount to live on while they repay tax debts.
We are taking action to raise taxpayers' awareness of their rights and of the tools at their disposal for resolving issues, such as TAS. We need to be sure that all IRS employees are aware of their responsibilities with respect to ensuring taxpayers know their rights, and in particular, ensuring that taxpayers know how to engage TAS when they feel they are being treated inappropriately or are encountering excessive bureaucratic obstacles. The IRS leadership is committed to working with the National Taxpayer Advocate to evaluate the training provided to all IRS employees in this regard and modify it, as appropriate, to make necessary improvements to fill whatever gaps may exist in the current process or actual behavior.
Copyright 2013 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Articles in this publication are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 07/23/13