This stuff is obvious …
The IRS is auditing fewer and fewer returns every year
The IRS will never be able to police the tax laws by auditing
If it wasn’t for CPAs and other tax professionals, the entire tax system would collapse
235 million tax returns will be filed this year
The IRS employs 92,000 people (growing steadily)
Only a few of them are auditors
General competence at the IRS is declining
General competence among tax professionals is declining
Accounting Today reported recently that the IRS audit rate hit a new low. But like most stuff in the news, there’s more than meets the eye here. Let’s dig a little deeper and see what’s going on.at the IRS.
First of all, is this the only problem the IRS is dealing with?
No. We have problems with the IRS in every area. Think of it as a roulette wheel. When you deal with the IRS it’s like spinning the wheel in one direction and spinning the ball in the other direction. The quality of IRS service depends on which of the 38 pockets the ball lands in. If you get the best pocket, you get generally polite, courteous and reliable service. If you land on the worst pockets (there are more ‘worst’ pockets than ‘best’ pockets) you get the cruel psychopaths who just got off the ship from Venus. On all the pockets in between you get unusual and generally disagreeable people.
Or they transfer your issue from one department to the next until they run out of departments and begin all over again. Or they just drop you in a hole and forget about you.
So what is really going on at the IRS.
If you ask them they will tell you budget cuts are causing the problem. But you know what, it ain’t budget cuts. IRS budget and staffing has been growing for years. As far as I know there has never been a budget cut at the IRS.
Something else is the problem.
You may remember a few years I began complaining (though I do it less nowadays) that the really competent people at the IRS had begun retiring and they were being replaced by less experienced and generally unreliable staff. Believe me, it’s tons better to work with an knowledgeable and sharp adversary than an incompetent who is driven by emotion. For the last several years, the problem has simply exacerbated.
Recently, one of our staff got lucky and her ball landed in the ‘best’ pocket. She was told the problem was the budget (ha, ha). But he went on to say the IRS has been cutting back on training. The need is so great the IRS is pulling people off the street and putting them right to work on your case. That’s the real problem.
IRS called to account.
Briefs were filed today in a case against the IRS for retaliating against taxpayers who refused the IRS request to extend the statute of limitations. Extending the statute of limitations is standard procedure in an audit. They’ve extended the statute in most of the audits I’ve been involved in. In this case they issued a court summons. And this case is about whether that summons should be quashed because if it was enforced it would be a abuse of the ‘due process clause’ in the constitution.
This is good news. Perhaps the Supreme Court will put an end to this practice.
This exact threat has been used to force taxpayers to sign extensions for years. If we’ve represented you in an audit, you may well remember this happening, and me telling you if you didn’t sign, the IRS would retaliate big time. Finally someone with the bucks to do it, has stood up to the IRS.
Tiger by the tail
As the revenue collecting arm of the U.S. government, the IRS has a tiger by the tail. They’re frantically trying to automate everything because it’s difficult to replace all their good people at once. Plus, as I’ve said for years, the tax law would never have gotten so complex if it weren’t for computers. The IRS has been unable to deal with that triple edge sword.
On the other side of the coin, the same thing has been happening to the tax preparation profession. Since quality really does rise to the top, this development has been a boon to our firm, but the general quality of returns filed has deteriorated. We’ve been at this long enough that we’ve developed the competence to deal with it effectively. But most firms haven’t, and the level of incompetence rose dramatically until the IRS had to get involved to police the profession and try to restore order. As odd as it may sound, I was in favor of that because I see a ton of incompetence out there. But a lawsuit killed that. So the profession will continue to go wild and incompetence will continue unabated.
Protecting Clients From the IRS
To protect our clients, we closely follow what the IRS is saying, what it’s doing and what it’s auditing. We know what the IRS is auditing and we pull any audit triggers off your returns before we file them. Two audit triggers we monitor constantly are (1) S corp tax officer wages and Schedule C’s filed with your 1040.returns. The way we deal with them may be surprising to many, but our approach has been effective. For the last three decades no tax returns filed by us that followed our advice has been audited. If you don’t follow our advice, then you may very well get audited. That has happened at least twice in the past decade. That number appears low because most of our clients follow our advice.
If you do get audited, we’re prepared with strong arguments ready and waiting for your defense. These arguments and defenses have been thoroughly tested in the cauldron of actual tax audits.
Our Approach
Some people think we’re aggressive because we’re so effective at cutting taxes. But we’re not the least bit aggressive. We never stray into the middle of the dreaded gray areas. We stay right smack dab in the middle of the tax code. Everything we do is built on the solid rock foundation of the tax code and actual court cases. We are confident enough to say we will save you more than we cost.
Thus far we’ve ‘won’ all of our audits. Not that there are winners and losers, but no client has ever been dramatically dinged in an audit, other than those that didn’t take our advice. And even then we were prepared to push it further, and thought we had a winning case, and the client decided otherwise. In every case, the taxpayers paid SUBSTANTIALLY less than what the IRS wanted.
We’ve pushed only one tax return all the way to court, and that one was settled satisfactorily before it even got to court. We won that one on all the major issues. The IRS may be pulling some administrative maneuvers, but they won on every issue. We don’t love going through audits, but we are decently good at it. However, I personally tend to be a little bit impatient with the IRS.
Back to Incompetence
Sometimes the issue here is that sometimes the incompetence at the IRS is so egregious they simply don’t understand the law. More times than I would like to mention, I have had to explain the law to auditors or appeals agents.
Or it may be just that they turn a blind eye to it. It used to be that the IRS didn’t want cases pushed up to appeals or all the way to court if they could prevent it. So they would come to their senses about contentious issues whenever they could. But that’s not the case any more. One agent took a dislike to our client and pushed us up to court out of vindictiveness.
I used to say you generally got a sane agent at the appeals level. But I no longer believe that. I am always pleasantly surprised whenever I encounter a competent, gracious IRS agent. The are some, but I don’t think that’s the culture there any longer.
bizztrategy @ Ellis CPA 