What to expect from the IRS this year.
From The Tax Adviser:
Examining the 1997 Examination Program
T he Internal Revenue Service, like most other government agencies, has to tighten its budget while trying to achieve more goals and objectives. CPAs and their taxpayer clients can get an idea of the areas on which the IRS will concentrate its assets this year by reviewing the priorities, areas of emphasis and underlying philosophy of its 1997 examination program.
The services main goal is to improve productivity on examinations by increasing the average amount assessed from and paring the time spent on each examination and reducing the number of corporate examinations in which no changes are recommended.
"Large business" examinations. The IRS will continue to examine taxpayers with assets over $10 million that do not fit into its Coordinated Examination Program (CEP). Audit techniques currently used exclusively in CEP cases, such as the increased use of audit specialists (computer, employment, excise, employee plans), will be implemented for non-CEP taxpayers.
The IRS still will emphasize the use of alternative dispute resolution techniques to resolve issues at lower levels of examination. In addition, some practices that officially are available only to CEP taxpayerssuch as opening conferences, periodic updates and briefings with the case managermay be extended to non-CEP taxpayers.
Partnership returns. The IRS will increase its audits of partnership returns by (1) looking at a narrower range of issues on a larger number of returns, (2) encouraging the examination of returns associated with large corporate and CEP examinations, (3) focusing on real estate partnerships and (4) completing a project on the use of the low-income housing credit, which is claimed by many partnerships.
Excise taxes. The IRS will examine motor fuel excise taxes more closely, with additional emphasis and training directed toward motor fuel and petroleum by-products, telecommunications and manufacturing excise taxes.
Employment taxes. The IRS will continue to focus on the following worker classification issues, primarily among midsize companies:
- Reclassification of entire classes of workers.
- Cash payment schemes set up to avoid employment taxes.
- Failure to file forms 1099 and W-2.
- Fringe benefits and deferred compensation.
- Reporting and taxation of tip income.
The IRS also launched several research projects designed to measure compliance and test corrective actions in six specific areas:
Automotive market segment. The service will examine the accuracy of reporting for new and used car dealers and for service stations.
Tipped restaurant employees. Reporting income and taxes on tips (both the employer and the employee portions) has been the source of continuous controversy and conflict. The IRS will try to increase the number of filings of Form 8027, Employers Annual Information Return of Tip Income and Allocated Tips , as well as the percentage of tips reported by both employers and employees and the tax collections from tip income.
Individual nonfilers. The IRS will focus on approximately 10,000 high-income repeat nonfilers that can be identified through profiles and criminal investigation referrals.
Return preparers strategy. The IRS will study the characteristics of individual returns produced by paid preparers to identify any trends and differences.
EDAS. An electronic disclosure authorization system (EDAS) will help verify return information provided by taxpayers on applications for mortgages and business loans to prospective lenders. The IRS will examine some returns to determine the accuracy of the information provided on such applications.
Multiple use of SSNs. The service will focus on the duplicate use of Social Security numbers (SSNs) currently encountered on filed returns, initially when an SSN is used as the primary taxpayer on one return and claimed as a dependent on another.
For a discussion of these and other developments, see the Tax Practice & Procedures department, edited by Mark Ely, in the April 1997 issue of The Tax Adviser .
Nicholas Fiore, editor
The Tax Adviser