Every year, the IRS rolls out new initiatives to make sure everybody is complying with the tax laws. While certain things, such as frivolous tax arguments, are always enforced, the IRS shuffles personnel around to enforce compliance with certain parts of the tax code based on the trends they identify. Five of those trends are discussed here.
1. Foreign accounts and assets. If you have money or assets overseas, the IRS wants to know about it. If you have more than $10,000 in a foreign bank account, you’re required to file an annual disclosure statement with the Treasury Department. In addition, the IRS is now requiring foreign banks to enter into information sharing agreements, or else have 30% of payments transferred to them from the U.S. withheld to pay potential tax bills. The failure to disclose your overseas assets can result in significant penalties, and potentially criminal prosecution.
2. Payroll taxes. The majority of my clients over the past four years have been small businesses that owe back payroll taxes to the IRS. The single biggest emphasis of enforcement within the employment tax arena has to do with taxpayers that pyramid their employment tax liabilities, meaning that they owe money, and continue to accrue new liabilities each quarter. The IRS is also heavily targeting the owners of S-corporations that don’t pay corporate officers a fair wage (and thus payroll taxes0, but rather take nothing but distributions (which are not subject to payroll taxes).
3. Gift tax audits. Many people don’t realize that giving cash gifts to their friends and family can have tax consequences. Every person has a lifetime cumulative exemption from gift taxes, and there are also annual limits. The IRS has actually started to electronically examine property transfers based on public records in order to ferret out people that may owe gift taxes.
4. Automated Substitute for Return Program. Section 6020(b) of the Internal Revenue Code allows the IRS to file a tax return for you if you fail to do so. They prepare this Substitute for Return (SFR) based on information they have on file, such as W-2 and 1099 information sent to the IRS by your employer. A computerized system now prepares these returns, and the IRS has asked Congress for the past several sessions to make it a felony when you fail to file a tax return for three out of five straight years and the tax exceeds $50,000. This hasn’t made it’s way through Congress yes, but expect it to after the election year is past.
5. Schedule C audits. The IRS just spent several years and millions of dollars to analyze the tax returns of small businesses that file a Schedule C (sole proprietors and self-employed individuals). Based on this analysis, they have developed a set of criteria for attempting to determine who is either under reporting self-employment income, or overstating their expenses. The IRS believes that the biggest piece of the “tax gap” comes from the self-employed, and they’re probably correct in that assumption. They are now heavily scrutinizing Schedule C’s attached to personal income tax returns and increasing audits against self-employed folks that raise any red flags.
Knowing what the IRS is focusing on can help you make decisions about how to handle your own tax situation. After reading this, perhaps you’ll consider forming a corporation, partnership, or LLC in order to run your business, rather than operating as a sole proprietorship. Or perhaps you will give consideration to paying yourself a salary out of your S-corp, or think twice about how you send money to an overseas account.
Never forget that, no matter what, the tax code doesn’t require you to pay one single penny more to the IRS than you have to. Even if you are the subject of one of these increased enforcement measures, you still have rights, and if you did everything right, then you have nothing to worry about. If something somehow did fall through the cracks, you still have rights, and their are ways to get things straightened out — never forget that!
Until next time,
Jassen Bowman, EA