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Monthly Archives: September 2017

IRS Audits – How Are Tax Returns Selected for Audit?

September 1, 2017

In order to determine how to respond to an IRS Tax Audit, it is helpful to understand how tax returns are selected for examination. The IRS selects returns for examinations in several ways, some based upon objective criteria coded into a carefully protected computer program and others based upon old fashioned investigation work. 

Selection for an IRS Audit does not always suggest there’s a problem. The IRS uses several different methods:
  1. Random Selection and Computer Screening?  Sometimes returns are selected based solely on a statistical formula. The IRS compares your tax return against “norms” for similar returns. The IRS develop these “norms” from audits of a statistically valid random sample of returns, as part of the National Research Program the IRS conducts. The IRS uses this program to update return selection information.
Many returns are selected through the use of a computer program called the Discriminant Function System (DIF). This program scores each return that is filed for potential error based upon past IRS audit experience. The returns receiving high scores are made available for examination. IRM 4.1.3.2 (10-24-06). The DIF formulas are listed in the Law Enforcement Manual, which is not publicly available.

    1. The Discriminate Function (DIF) score is the product of a mathematical formula for identifying and selecting returns for examination.
    2. The program scores tax returns using a formula based on historic information obtained from specific examination programs. A high DIF score indicates a high potential for adjustment.
    3. The Service periodically conducts compliance studies to update and reformulate its basis for audit selection formulas. 
    4. Different types of taxpayers and returns are subject to different DIF formulas. While the specifics of the program are not public, certain items appear to cause a return to be selected for examination, such as:

                                                               i.      Participation in a Tax Shelter,
                                                              ii.      A large Charitable Contributions,
                                                            iii.      A Home Office Deductions
                                                            iv.      A Large Travel & Entertainment Expense (e.g. Sky Box. etc.) or
                                                             v.      A Large Automobile Expense.

Returns selected under the DIF program are then manually screened, so that attachments to the return and other data that a computer cannot detect can be properly considered.
Other returns are selected at random under current national or regional studies, such as the National Research Program (NRP), the successor to the Taxpayer Compliance Measurement Program (TCMP). The results of these examinations are used to measure and evaluate taxpayer compliance and to revise the DIF program. NRP and TCMP audits.
Alternatively, the IRS may receive information from other federal agencies. (See IRM 4.6.2 (8-1-02)) and they may also receive information through federal-state programs (See IRM 4.1.4.2.4 (10-24-06)).

  1. Related examinations – The IRS may select your returns when they involve issues or transactions with other taxpayers, such as Business Partners or Investors, whose returns were selected for audit. This is affectionately referred to as an “Audit by Infection.”
  2. Review After Selection by IRS - After selection, an experienced auditor reviews the return. They may accept it; or if the auditor notes something questionable, they will identify the items noted and forward the return for assignment to an examining group.
a.       Filing an amended return does not affect the selection process of the original return. However, amended returns also go through a screening process and the amended return may itself be selected for audit.

b.      A refund is not necessarily a trigger for an audit, but it could trigger an examination.

4.      Information Provided by 3rd Parties – The Service also relies on information provided by third parties, such as banks, brokers and employers. Much of this information is required to be reported by payers of certain types of income on Forms W-2 or 1099.

5.     Referrals by IRS Agents -Referrals may also be made by other examining agents. For example, the return of a party related to another taxpayer being audited, such as the partners of a partnership being audited may also be selected for audit. The Service also may investigate tips regarding potential noncompliance, and select those returns for audit as a result.

6.     Other IRS Audit Triggers - Examinations may also be triggered a variety of other ways, such as, by mathematical errors or missing information. Also, a claim for refund can potentially trigger an examination.

The IRS has broad authority to examine tax returns. An understanding of the rights and responsibilities of both taxpayers and the examining agent can help reduce the scope of a tax audit or examination and can lead to a more favorable disposition.



 

Read more at: Tax Times blog

How Will the IRS Know About My Foreign Account?

September 1, 2017

Taxpayers who have financial assets outside the United States often ask the question "How will they (IRS) know about my Foreign Account?;" when they are considering how (or whether) to come clean and inform the IRS about their previously undisclosed foreign financial accounts.

For years, there was little public knowledge of the U.S. government’s foreign financial reporting requirements, and enforcement of those rules was not always very strict.

However, since 2008,  a string of scandals involving foreign banks and investigations by the U.S. government into various non-U.S. financial institutions has garnered international media attention and changed the way governments around the world deal with offshore financial accounts.

 

1. FATCA. In 2010, the U.S. Congress supplemented its existing international tax treaties and information exchange agreements by passing the Foreign Account Tax Compliance Act (“FATCA”).
    • The main goal of FATCA was to make it more difficult for U.S. taxpayers to hide assets in offshore accounts and entities and therefore to increase U.S. tax revenue by ensuring income from those accounts is reported in the U.S. Government officials have estimated that the U.S. loses between $40 billion and $70 billion a year in unpaid taxes on offshore assets.
    • FATCA requires worldwide financial institutions to report to the IRS certain information about accounts that are owned by U.S. persons (whom they identify through a variety of methods, including the request of Forms W-9).
    • While FATCA has drawn intense criticism from around the world (and in the U.S.), it now appears that the law is here to stay, and other governments have made similar strides in increasing the scope of their international tax information exchange.
2. Swiss Bank Program. The U.S. government recently ended their "Swiss Bank Program" a disclosure program that forced Swiss banks to reveal the ways in which they helped U.S. taxpayers evade taxes.
 
    • Over the three year program, the U.S. gathered information from 80 Swiss banks and collected over $1 billion in penalties from those banks.
    • The program also provided information to the IRS about other jurisdictions that may commonly hide U.S.-owned assets.

3. Data Mining. The IRS also continues to "Data Mine" to gather information provided by the more than 54,000 taxpayers who have filed under the IRS’ Offshore Voluntary Disclosure Program since 2009.

    • The U.S. will use this information to assess what other jurisdictions, foreign banks, and facilitators may be assisting U.S. clients in evading their tax obligations and to assist in future prosecutions.

4. Panama Papers. In April 2016 over 11.5 million financial and legal records from Panamanian law firm Mossack Fonseca where leak to the press, which underscores the risk of public disclosure of financial records related to undisclosed foreign financial accounts.

    • An anonymous source provided the information in the “Panama Papers” leak to various global news organizations that have since been reviewing the files in detail.
    •  The leak created a scandal for many high-profile politicians around the world and forced some to resign.
    • It was revealed that the firm had created over 2,800 companies in offshore havens for over 2,400 U.S. clients as well.
    • While many of these transactions are legal, U.S. taxpayers must fulfill various foreign information reporting requirements with the IRS related to non-U.S. financial accounts and entities, or they face substantial penalties for noncompliance.
    • In response to the Panama Papers, the U.S. government has also proposed and enacted new rules making it harder to conceal the identities of the true owners of companies.
    • The release of the Panama Papers is just the latest example in the ongoing movement around the world to make it harder for taxpayers to hide their assets offshore and evade taxes.
    • Nowhere has this movement been more pronounced than in the U.S., where government officials have repeatedly made clear that continuing to hide financial assets will get more and more dangerous and difficult, and that taxpayers should come forward as soon as possible to come into compliance with their U.S. tax and reporting obligations.

Marini & Associates, PA has assisted several hundred clients with coming into U.S. tax compliance and avoiding the draconian penalties that the IRS may impose on U.S. persons with undisclosed accounts.

Do You Have Undeclared Foreign Income?
 

 

 
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Read more at: Tax Times blog

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