News articles reveal that the Biden Administration is proposing an increase in the IRS budget by $13.2 billion to help with modernization, cybersecurity, and to help with compliance. It is expected that by employing 8,493 more full-time employees, every $1.00 spent on examinations will result in $8.00 returned via tax receipts. (Federal News Network [i])
Published online articles and newspapers reveal that the number of audits is down to less than 1%. More than likely, the number of audits will be increasing, especially for the wealthier taxpayer. Because the IRS is experiencing retirements of experienced personnel, it will take the IRS time to hire and train employees on the necessary audit techniques. As a result, taxpayers have time to plan with their CPA, EA, and others. In the meantime, it would behoove taxpayers to improve their recordkeeping system, and maintaining an accounting system, QuickBooks, Quicken, and other software would be beneficial. In addition, it would be wise to invest in a scanner and scan business and personal receipts that are relevant for substantiating expenditure on the tax returns. Maintain these records every year for at least three years, more for some business-related items, and include your completed tax returns. Also, remember to back up your records on an external drive or in cloud services.
IRS is aware of individuals who have not filed returns, and there will be a program that will approach them in an attempt to make them compliant. Failing to file returns is a misdemeanor, but if it can be proven that the taxpayer had knowledge of tax law and participated in overt acts of concealment or other” badges of fraud,” a tax misdemeanor could be elevated to felony income tax evasion.
The IRS and the rest of the individuals, small businesses, large corporations, and wealthy taxpayers are recovering from COVI-19 hibernation. The IRS will recover, and their activities will again become part of life. Remember there are three types of audits: correspondence audits, office audits, and audits by field agents. These audits may relate to income deficiencies or expenditure substantiation and involve two or three years of tax returns. The civil statute allows three years of returns to be reviewed, and the burden of proof is on the taxpayer. The auditor will be interested in identifying items for audit, so the taxpayer should explain those items, present the necessary records, and then move on. The criminal statutes generally allow six years for investigation, and the burden of proof is on the IRS.
If any taxpayer is read their constitutional rights by a Special Agent with a badge and carrying a gun, they should suspend the interview and contact a lawyer.
Most individuals will be confronted by an auditor, and to be successful, they will need their records ready to be responsive to the request for documents requested by the auditor. At that time, they may also elect to represent themselves, have an authorized representative accompany them, or send a representative with power of attorney, the records, and explanations.
Sage Investigations knows the ins and outs of the IRS due to our principal being an IRS Special Agent for 26 plus years. If you or your client is being audited, do not come up against the IRS alone. Call Sage Investigations at (512) 659-3179 and let our experience work for you. Click to read about our team and their CVs