IRS Is Picking on the Little Guys -- And Losing Money By Doing It

lower your odds of an IRS audit Want to lower your odds of an IRS audit? Try filing as a multibillion-dollar corporation.

The IRS has increased audits of small and midsize businesses, and has decreased its audits of massive corporations, according to a recent study by Transactional Access Records Clearinghouse, a research group at Syracuse University.

Among TRAC's findings: The IRS cut back the hours it spends auditing large companies -- those reporting assets of $250 million or more -- by one-third, even though those corporations have the highest underreported taxable income/assets. TRAC's report suggests that on an hour-by-hour basis, auditors recover $9,354 per hour from large corporations' filing errors, which is eight times higher than tax dollars recovered in audits of small and midsize businesses.

The obvious conclusion? If the IRS were serious about recovering tax revenue -- especially given the ballooning federal deficit -- it would go after the big fish first.

Not Enough Auditors?

Even in the cases of the biggest fish -- corporations with $5 billion or more in assets -- the percentage of audits decreased 17% over the last two years. (The audit rate dropped from 78 per 100 returns filed in 2007 to 64 audits per 100 returns in 2009, according to TRAC data.)

An IRS spokesman wasn't immediately available to comment.

In defense of the IRS, the agency may not have the manpower to audit the more complex filings of massive corporations, especially since it has had to shed some staff. In 2006, for example, well before the financial crisis, the agency planned to lay off 157 of its 345 estate lawyers. A January report from the Treasury Department's inspector general for tax administration found that "insufficient and inexperienced staff could reduce the ability to detect and stop fraudulent refunds." (The report focused on pre-refund fraud detection that was recently transferred from the IRS's Criminal Investigation Division to the Wage and Investment Division.) Various studies over the years have also shown that the IRS is understaffed. The number of permanent employees is significantly lower now than it was in the early 1990s, even as the number of returns has dramatically increased.

Outrage in Seattle

It would be easier to buy that argument, though, if the IRS didn't have a long history of going after the poor and powerless -- perhaps they're the lowest-hanging fruit. A Pulitzer Prize-winning New York Times story published 10 years ago, for example, harped on the fact that the IRS audited 1.36% of all tax returns filed by people who made less than $25,000 per year, compared with 1.15% of returns filed by people who made $100,000 or more.

And in a recent case that stirred outrage in Seattle, Rachel Porcaro, a single mom of two boys who made less than $20,000 working at Supercuts, was audited because her income was too low. The IRS suspected she was making money that wasn't being reported, otherwise she wouldn't be able to afford to live in Seattle. Perhaps if Porcaro had claimed assets of $250 million or more, she could have avoided the whole hassle.

Top Tax Deductions for Consultants

Consultants are likely to have deductible business expenses that can help you save big on your taxes. A checklist can help you account for every deduction you’re entitled to use. Here are the top tax deductions for consultants.

Read More

Brought to you by TurboTax.com

Seven Things You Didn't Know About Taxes

You know your federal taxes pay for government programs and services, like roads and national defense. And you may even know the difference between FICA and income tax. But did you know if you want to buy sparklers in West Virginia, you can expect to pay a special fee?

Read More

Brought to you by TurboTax.com

2018 Tax Reform Impact: What You Should Know

Congress has passed the largest piece of tax reform legislation in more than three decades. The bill will affect the taxes of most taxpayers, but one key point to keep in mind is that for most people, the bill won't affect your taxes for 2017 (the one you file in 2018).

Read More

Brought to you by TurboTax.com

Video: How to Estimate the Value of Clothing for IRS Deductions

Learn how to estimate the value of clothing for IRS tax deductions as charitable donations. The value of clothing donations to charity are based on published lists of retail values or current thrift store prices. List your donation values on the Form 8283 with the help of TurboTax in this video on filing annual taxes.

Read More

Brought to you by TurboTax.com
Read Full Story