As of late, I have seen several media reports inferring, or simply predicting, that the IRS is likely to do fewer tax return audits going forward, and even that the IRS will be less harsh on future audits as an indirect result of recent IRS controversy and negative publicity. While I cannot directly comment on such predictions, there are a few things that taxpayers should keep in mind for the future, especially if tempted to believe such predictions.
But first, why are we seeing such commentary? I'm sure you've heard that the IRS is under scrutiny by Congress for issues surrounding the delay of certain groups' nonprofit organization applications. The IRS has also received overspending allegations for convention purposes, including the making of dance and Star Trek videos and lavish spending during business travel, among other things. Basically, the IRS is having a bit of a hard time.
From congressional hearings to changes at the highest level of IRS leadership and continued scrutiny of IRS practices in various areas -- it has simply been a tough month for the IRS and will continue to be for the near future.
History shows that the IRS is actually getting much better at tax administration and collections. In fiscal year 2012, the IRS audited 1.5 million individual returns (approximately one percent of all individual filers) and spent just 48 cents on every $100 collected. How did they do that? More than 75 percent of those returns examined received a correspondence audit, a letter explaining there was an error on their tax return. Most of these notifications are created by ever increasingly sophisticated software and computer programs combined with better technology and more cross-referenced taxpayer data. The IRS simply has better computers and systems, and with them, more data is being shared amongst government agencies faster and in greater detail than ever before.
In addition to better, more cost-efficient collections, the IRS will have to keep up with the new, more austere government budgeting. Their budget is continually under pressure and based on select recent congressional member comments, that is not likely to change soon, meaning the IRS will have to do things cheaper and more efficiently.
While we may see a return to the "kinder and gentler" IRS mandated in the IRS Restructuring and Reform Act of 1998, it is a simple fact the IRS will continue to do their primary jobs of enforcing U.S. tax laws and collecting federal income tax. They simply are not likely to reduce their current volume of returns examined and taxpayers audited.
What should you do to ensure you don't get one of those dreaded "We found an error on your tax return" IRS letters, or even worse a more detailed in-person audit of your tax return?
To start, do not panic or ignore the letter hoping it will go away. I previously detailed information on what to do in these situations, and you can review that information here.
Even with all of IRS current issues it is definitely not a best practice to get aggressive or creative with the tax returns you file. One of the most common urban myths related to taxes is the IRS will not bother to review a tax return if the deductions fall inside of the "accepted average." There is no accepted average deduction amount, and the IRS has an ever-increasing capacity to verify a large number of deductions claimed using modern technology, software algorithms and other new techniques.
Remember, the IRS is better, faster and more technology based than ever before, and they're getting better every day. Take the deductions, tax credits and other benefits you are entitled to and have documentation and records for support, but don't be tempted to claim more than you can prove, thinking the IRS is too distracted to catch you.
A little bit of planning now can help you avoid getting an IRS letter and being in the one percent of Americans audited annually. Make sure you have all your receipts for your deductions. Keep records of all your income -- wages, investments and other types of income. Finally, plan for life changes that can sneak up on you but that have the potential to drive significant tax changes.