The IRS has undergone dramatic budget cuts in recent years, and this has and will continue to affect IRS examination and collection procedures, and enforcement actions. Tax practitioners, CPAs, EAs and anyone involved in taxpayer advocacy services must ensure they understand how these budget cuts will affect everything from enforcement actions to identity theft, and how these changes will affect their clients.
IRS’s Increased Focus on Enforcement
The IRS, in its Budget Brief for 2017, mentions that funding priorities are focused, among other things, on “facilitating voluntary compliance by empowering taxpayers with secure innovative tools and support” including self-service options, early error detection and resolution tools to reduce taxpayer burden.
Tax return preparers who participate in the IRS’s annual filing season program would receive a record of completion from the IRS and be included in an IRS database that includes CPAs, EAs, ERPAs and enrolled actuaries, noted tax attorney Robert McKenzie in a recent webinar with EliFinancial.
Another area of focus for the IRS is to “understand non-compliant tax behavior and develop approaches to deter and change it” by leveraging data and network analysis to “investigate abusive tax schemes,” as per the budget brief.
FATCA Continues to Drive Enforcement
Also, IRS focus is on “enforcement and deterrence of non-compliance abroad through the implementation of Foreign Account Tax Compliance Act (FATCA).” FATCA covers 150 countries that have signed agreements for their banks to report accounts of U.S. taxpayers to the IRS, according to McKenzie, including over 200,000 foreign financial services that report to the IRS.
Tax practitioners should advise their clients to voluntarily and timely disclose unreported offshore income. Failure to do so would mean the taxpayer would pay back-taxes and interest for eight years, as well as either an accuracy or delinquency penalty on all those years, according to McKenzie.
The budget brief also mentions the IRS’s intent to use its funding to “improve audit and collection coverage rates,” and according to McKenzie, employment taxes, in particular, will continue to be a focus for audit and enforcement. Tax practitioners advising their clients will need to be more vigilant than ever about the records being submitted.
Your Role in Prevention of Business Taxpayers Identity Theft
The 2017 IRS budget brief also mentions another focus area for the IRS is to “strengthen cybersecurity and eliminate identity theft.” In October at the Security Summit, IRS commissioner Koskinen emphasized the continued focus on tax-related identity theft and additional safeguards the IRS is developing to protect taxpayer data.
While the number of identity theft-related tax returns has fallen in the last two years, according to Koskinen, the IRS plans to “increase [its] focus on protecting business returns from tax-related identity theft” in the 2018 tax season. One of the IRS’s strategies to achieve this goal is to ask tax professionals who represent business clients to obtain more “key information” such as “the client’s tax payment history and parent company information” to help the IRS determine that the filer is legitimate.
Tax Practitioners to Assume More Responsibility and Accountability
Overall, the IRS continues to dramatically change its investment strategy according to budget considerations, with a major focus on increasing voluntary taxpayer compliance, understanding and reducing noncompliant taxpayer behavior and improving taxpayer data security.
Because the agency has frequently been criticized for not being able to effectively handle its budget and the revenues generated from enforcement actions, the agency also plans to improve operational efficiency through a more efficient electronic records management program. There will continue to be an increased scrutiny on tax filers, facilitated by the increase in e-filing of tax returns, an integrated records management system, and the IRS’s determination to use data-driven systems to analyze taxpayer records.
The IRS has also emphasized that the taxpaying public is a partner in its initiatives for voluntary compliance and identity-protection efforts. The conclusion: Both taxpayers and their representatives are more accountable than ever before. Tax practitioners must ensure they understand the IRS’s focus areas in the future and ensure their clients are in compliance with the changing Internal Revenue Code requirements.