More Dollars for IRS

by Robert E. McKenzie

The Bush administration 2004 added more IRS resources for compliance. Specifically, the budget request would add an additional $109.8 million and 1,599 staff members to enhance compliance. Most of the extra resources will he allocated to five areas.

First, nearly half of the extra money goes to the IRS Small Business/Self-Employed (SB/SE) Division, which would apply the extra resources to beef up many of its existing compliance programs and Aleverage new workload selection systems and case building from on-going reengineering efforts.@ The rationale is in a new IRS acronym: ABLE (achieving balanced levels of enforcement). ABLE would provide $55.5 million and 887 additional staff members in 2004. Areas receiving additional attention include organized tax resistance, abusive trusts and shelters (including offshore credit cards), special purpose entities, and employment tax schemes. The abusive trusts and shelters and special purpose entities effort would primarily affect high-income individuals who use structured transactions and flow-through entities (for example, partnerships) to conceal tax liability and avoid payment of taxes. The IRS estimates that abusive tax schemes cost the government up to $40 billion annually in lost tax revenue. With the ABLE funds, the IRS expects to close 20,999 examinations on flow-through returns in fiscal 2004. This is a 110 percent increase over expected fiscal 2003 levels, according to the IRS. Also, the IRS expects to close 78,244 individual examinations on returns with income in excess of $100,000. This represents a 33 percent increase C or more than 19,600 more return closures C over expected fiscal 2003 levels.

Second, the White House budget added for the IRS Wage and Investment Operating Division (W&I) an extra $3.6 million and 67 extra staff members to reduce the existing nonfiler inventory. The IRS has a nonfiler inventory of 6.8 million taxpayers, of which 1.6 million will be selected for potential con-tact in fiscal 2004. The IRS also intends to focus on a questionable Form W-4 program as a first step in establishing higher levels of voluntary compliance with the filing requirements. One way for taxpayers to avoid filing is by inflating the number of dependents for withholding purposes on the Form W-4. Although the number of questionable Forms W4 reviewed in recent years has decreased, the IRS believes that reviewing additional W4s will improve filing and payment compliance across the W&I population. W&I would also devote more staff to the automated substitute for return (ASFR) program, which allows the IRS to create a return for a potential nonfiler so collection action on a possible tax debt can begin. With increased ASFR efforts, the IRS hopes to reduce the inventory of non-filers. Specifically, the IRS hopes ASFR will result in approximately 82,000 closures, $74 million net assessments, and $14.5 million collected. The effort could create $60 million in extra accounts receivable.

Third, W&I expects to reduce the size of the accounts receivable by devoting $4.5 million and 100 more staff members to this effort. According to the IRS, it estimates that this will allow for the closure of 16,000 more cases in 2004 that should result in an additional $22 million in revenue.

Fourth, W&I is devoting an extra $2.2 million and 51 staff members to automated underreporter (AUR) cases. The IRS contends that it can work only 30 percent of the five million cases currently in inventory. The extra staff would allow the IRS to work an additional 116,000 cases in 2004, which could result in roughly $98 million in additional assessments.

Fifth, LMSB has apportioned an extra $22.4 million and 258 staff members to increase examinations of large flow through entities and abusive corporate transactions. The Service has designated abusive tax shelters as one of the highest priorities. With existing staff allocations, this means that 949 staff members will be working in the tax shelter area. In the short-term, this group=s productivity is likely to decrease because experienced auditors will probably spend their time training newly hired staff rather than focusing on examinations.

More Money Sought in 2005 Budget

President Bush's 2005 budget tries to reverse the decline in muscle with an extra $393 million to help fund 2,900 new full-time IRS enforcement staff. About two-thirds of the added resources will go to crack down on tax abuses among corporations and the wealthy, Everson said. Cash-strapped coffers in states get 20 cents for every extra $1 the IRS can collect in unpaid taxes owed. Besides fraudulent tax shelters, the IRS is cracking down on nonprofits that abuse their tax-free status. In particular, the agency has zeroed in on nonprofit credit counseling services, auditing nine of the 15 largest providers in the $1 billion-a-year industry.

More Audits of Wealthy

The IRS increased its audits of individuals and couples making more than $100,000 last year, focusing most of the extra attention on people making $250,000 or more. Still, even high-income taxpayers faced low odds of being called upon to document their expenses and deductions. Despite the 24 percent increase for taxpayers who earned $100,000 or more, the IRS audited only one in 95 returns filed by big earners. Individuals at all income levels faced slightly higher chances of an audit last year. Overall, the IRS examined 1 in 153 returns last year, compared with 1 in 174 the previous year. The audit rate still lags from the rates in the mid-1990s when the agency looked at about 1 in 60 individual returns.

Increased Collections

In an effort to best use its money and manpower, the IRS has focused its search for unpaid taxes on high-income individuals, corporations and income hidden in offshore accounts. The IRS last year reaped $35.5 billion through collection efforts last year, the most in a decade. Audits of the nation's largest corporations, nevertheless, fell for the 8th consecutive year. About 12 percent of corporations with assets exceeding $10 million were audited, compared with more than 14 percent the year before. Audits for small and midsize businesses also dropped slightly.