IRS PLUCKING ONLY LOW-HANGING AUDIT FRUIT?

In a recent article, several IRS corporate auditors are complaining that the IRS' focus on closing corporate tax audits is forcing auditors to pick up the easy tax dollars (the low hanging fruit) but leaving more novel and difficult tax collection dollars behind (the fruit higher up on the trees). Purportedly, auditors are incentivized to close cases quickly by paying cash bonuses and promoting auditors based on their success in closing cases. Taxpayers who abuse the system through new strategies win because the auditors are trying to close cases quickly and have little incentive to engage in more time consuming and protracted disputes relating to new tax abuse methods.

IRS officials dispute this, claiming that these are simply complaints from older agents unwilling to adopt new approaches. They point out that more tax dollars have been collected through audits in recent years, and that this vindicates the IRS strategy of puttings its resources into auditing more companies and focusing on large-dollar tax issues.

To read the entire article, click here. [IRS Auditors Claim Billions Lost Under Pressure, http://www.accountingweb.com]

QUESTIONS ABOUT APPRAISER PENALTIES

Internal Revenue Code Section 6695A imposes penalties directly on appraisers when their appraisals are used to support a substantial valuation misstatement or a gross valuation misstatement. The penalty can be significant – it is generally the greater of 10% of the resulting tax underpayment, or 125% of the fee paid to the appraiser. However, no penalty is imposed if the appraiser can show that the value established in the appraisal was more likely than not the proper value.

The American Bar Association Section of Real Property, Probate and Trust Law has studied this new Code Section and provided comments. The task force addressing the issue noted various questions about the new statute, and also gave its recommendations for how those questions should be resolved.

Some of the comments include:

1. Will the provision apply to estate and gift tax valuations or solely to income tax valuations? The task force recommends that the penalties be limited to appraisals for charitable contribution purposes.
   
2. Who are the persons that can be penalized? Does it include return signers and preparers, executors, or others? The task force recommends that the statute be clarified to limit penalties to "qualified appraisers" (a defined term under the law).
   
3. What constitutes an appraisal? For example, is a best guess valuation by a CPA an appraisal subject to penalty? The task force recommends limiting such appraisals to the strictly defined term "qualified appraisal" under Code Section 170.
   
4. Do persons who assist in the preparation of the appraisal become subject to penalty, or only the person (or firm) who signs the appraisal? The task force desires to limit the persons at risk to the appraisal firm itself and the person signing the appraisal.
   
5. How should the penalties be applied when one appraiser relies in part on another appraisal?
   
6. At what point in a tax controversy will the penalties be imposed? The task force recommends only after the final resolution of the case.
   
7. Will the penalties apply to appraisers hired by the government in a tax controversy? For the sake of fairness, the tasks force suggests that such appraisers be subject to penalty.
   

The task force also recommends that the appraisers be able to assert a "reasonable cause" defense, since some types of properties are subject to a wide variation in value that can unduly punish appraisers, and that appraisers will have a hard time arguing that the appraisal was more likely than not the proper value when it has already determined that valuation misstatement has occurred.

ABA TASK FORCE REPORT
[http://meetings.abanet.org/webupload/commupload/RP522000/relatedresources/695Acomments.pdf]

LEVEL OF IRS AUDIT AND ENFORCEMENT ACTIVITY

Once a year, the IRS issues information on its audit activities. The information is useful to determine what average audit risk is, and where the IRS is focusing its activities. Some highlights from the most recent information follows.

• 0.97% of all individual returns that were filed were audited – double the number from 2000.
  
• Of these, 40.3% related to earned income tax credit claims.
  
• 76% of audits are done through the mail.
  
• Individual returns with Schedule C (business) filings are audited at a much higher rate – 2% to 4% based on the amount of income reported.
  
• Only 0.1% of trust and estate income tax returns are audited.
  
• Almost 10% of estate tax returns are audited. 0.77% of gift tax returns are audited.
  
• Only 0.38% of S corporation returns are audited.
  
• 59,000 offers in compromise were received by IRS, and 25.4% were accepted. This number is less than in prior years.
  
• The IRS commenced 3,907 criminal investigations in 2006. There were 2,720 referrals for prosecution and 2,019 convictions. Of those sentenced, 81.7% went to jail.
  

The IRS received 1.561 billion information returns.