Does this seem like a silly question? Well it's not. Because slowly but surely, the IRS audit process has changed over the last 10 years and it is critical you understand why, if you or your business is the one who is the subject of an IRS examination.
In this video, tax attorney Anthony Parent speaks about both the public statements the IRS has made, along with his law firm's clinical experience helping thousands of taxpayers deal with an overbearing IRS.
While so many articles are written by tax lawyers, accountants, CPAs and other tax professionals about the IRS Audit Red Flags, Attorney Parent explains the reasons why these articles are obsolete.
Believe it or not, the IRS used to audit, or in IRS-speak “examine,” every single taxpayer. The reason is that when the income tax was first enacted in 1913, it only applied to those who were truly wealthy. No income tax was due until your income exceeded an inflation adjusted $500,000. And the top tax rate of 6% did not come into play until your income was at the equivalent of $12 million. Because the income tax affected so few people, the IRS had the resources to audit every single return.
This changed of course. When Congress blatantly and openly broke the central promise of income tax by applying the tax to nearly everyone — not just the truly wealthy as promised. This drastic change created a flood of new taxpayers that the IRS audit team could not keep up with. So the IRS began to audit only a portion of taxpayers year after year.
The purpose of these audits was to primarily ensure compliance. Believe it or not, assessing additional revenue was not the main goal of the examination division. Again, it was compliance compliance compliance. So anyone could be subject to an audit. The IRS really wanted to spread the misery around, and it did. Along with multibillion dollar corporations the IRS would also routinely audit the plumber down the street.
But things changed politically. The IRS is one of the least-liked organizations in the world. And many politicians don’t want to be seen as supporting the IRS. Yet, they don’t want that revenue the income tax brings in to dry up. So what’s the play for someone who needs to look like they are on the taxpayers side, but are still completely in love with that revenue the IRS brings in? Well it’s simple. Cut the IRS’s budget.
In fact, the IRS’s budget has been cut so much, in the last ten years, the IRS lost its most experienced agents and officers. Yet they haven’t been replaced. Yet, Congress insists the IRS do more with less. And because ensuring compliance isn’t really a goal that has a data points that one can rest their conclusions upon, the new focus for the IRS examination divisions has become something that is more measurable — that is, increased assessments.
So this is the sea change. The IRS is no longer interested in compliance for compliance sake, but rather wants examinations where there will be a good chance of assessing additional taxes and for them, massive penalties.
So what types of cases involve the prospect of huge additional assessments?
The focused targets we see are:
Domestic cases where the IRS suspects something egregious;
Cases involving foreign income and assets.
The IRS wants domestic audits where they suspect a slam dunk that could trigger massive civil fraud penalties along with a huge tax assessment.
And also, the IRS also wants more international audits. The reason?
Cases involving international income and assets are a huge penalty wonderland for the IRS. There exists a litany of penalties that can trip up any decent, honest, intelligent person.
Penalties of over $10,000 for not reporting the existence of a foreign bank account on what is known as an FBAR form, and penalties of $10,000 for not reporting the ownership of a foreign bank account on a slightly different form, a Form 8938 Along with:
A $10,000 for not reporting interest in a foreign business on Form 5471
A $10,000 for not reporting a Foreign pension on Form 3520-A
A $10,000 penalty for not reporting distributions from a foreign pension on a Form 3520.
A $10,000 penalty for not reporting a transfer to a foreign business on Form 926.
Multiple penalties for multiple years can really add up into the hundreds of thousands of dollars. Oh and by the way, this list is far from exhaustive. And willful FBAR penalties can even be higher
How to win your audit?
It is critical you get the highest level of legal representation possible if you are worried that a revenue-hungry examiner is looking at you as a mere target to aggregate into a press release.
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