The Audit Lottery

When IRS is not issuing regulations trying to stay on top of what the federal tax law means, it is of course responsible for enforcing the tax laws and collecting the revenue. In that regard, the audit process is its only real weapon. While computers have leveled the playing field somewhat, the agency over the last five years has lost more than 2500 revenue agents. These folks are in the trenches of tax compliance. For the most part, they are losing the battle. For all taxpayer classes, tax audit frequency is dropping. The individual tax audit rate fell to .7% which is about 1 return out of every 143 returns filed. And these audits are not being conducted in a full-blown fashion, but rather are handled by correspondence to a taxpayer focusing on perhaps one or two issues. For business tax returns, the audit rate was .49%, down 17% from last year. Those agents assigned to enforce the criminal tax law have also generated fewer tax cases. In 2016 only 3,395 criminal proceedings were initiated. A loss of some 12% over the prior year. Now enter Donald Trump and his proposal to cut the IRS budget by more than 14% in order to pay for additional funding for the defense budget and it is not difficult to see where audit rates and frequency will go in the next few years. Will paying taxes one day be a truly voluntary donation? They say for every dollar spent on IRS, the agency collects four. The Donald may be missing billions by being stubborn on this funding issue....or is he?

Tax Amnesty?

Birds do it, bees do it, even educated fleas do it… No, not that. With apologies to Cole Porter. What everyone is doing is tax amnesty. When New Jersey realized it was broke what did it do? Tax amnesty. Now Pennsylvania and Virginia are getting into the act. Pennsylvania will offer an amnesty program from April 21 to June 19. The offer is to waive all penalties and one half of the interest for taxpayers with tax delinquencies as of December 31, 2015. Failing to take advantage of the offer will result in an additional 5% penalty. In Virginia, tax amnesty will begin sometime from July 1, 2017 until June 30, 2018 and is scheduled to last 60 to 75 days. Other states continue to view the windfall for their tax coffers by offering some type of amnesty program. How far in the future is a federal tax amnesty program? Certainly IRS has had a great deal of success with its offshore tax compliance program which brought billions of dollars into the federal treasury by offering reduced penalties for those who came forward without the agency spending a great deal on enforcement activity. As the IRS budget shrinks further, it would seem that some type of tax amnesty across the board to all taxpayers may in fact be warranted. None has been offered to date. But these are strange times, indeed. So tax dodgers and non-filers may soon find a welcome mat back into the tax fold. But the best advice may be to do something now just in case this amnesty stuff ends up just a pipe dream.