Don't Mess With Taxes

Later today, IRS Principal Deputy Commissioner Daniel Werfel will go before the House Small Business Committee to discuss the agency's audit procedures.

Committee Chairman Rep. Sam Graves (R-Mo.) called the hearing to jump on the whack-the-IRS bandwagon ensure that the IRS isn't cherry-picking small business tax returns for added examination based on their political leanings.

This is the latest in tangential Congressional inquiry into the IRS following the Treasury Inspector General for Tax Administration report that groups, progressive as well as conservative, had their applications for 501(c)(4) tax-exempt status pulled for extra scrutiny based on be on the lookout, or BOLO, lists.

I'm hoping Graves et al will explain how they think this political preference targeting might work. Unless a company is named Go GOP Forever or Long Live Dems, it looks like such an effort would be more trouble than it's worth. We shall see.

As we wait for the hearing, the Committee has released Werfel's prepared testimony. As a preview, here are some items of note:

• In Fiscal Year (FY) 2012, the IRS audited approximately 1.65 million returns, of which 21 percent were small business returns. For FY 2011 the percentage was 22 percent and for FY 2010, 21 percent. This group includes filers of Schedule C and Schedule F, along with small corporations, S corporations and partnerships. The 2012 small business audit rate equates to only 0.2 percent of all returns filed, and 1.3 percent of small business returns filed.
• The IRS collected more than $50 billion in total enforcement revenue in FY 2012, the third year in a row the enforcement revenue exceeded that level. The amount collected in 2012 was actually lower than in 2011 and 2010, in part because of the economic slowdown.
• The FY 2012 numbers also reflected changes in agency staffing and budget resources. After a nearly flat budget in FY 2011, the IRS' FY 2012 budget was reduced by $305 million, leading to fewer employees in enforcement programs. Overall full-time staffing has declined by more than 8 percent over the last two years, and staffing for key enforcement occupations fell nearly 6 percent in the past year.
• As returns are processed, a majority of them are scored by a computer program for compliance risk, with a higher score indicating a higher probability that a change will be recommended during an examination. While the computer score is the most frequent reason for selecting a return for examination, there are other reasons a return may be selected. These include the need to reconcile what is reported on a taxpayer's return with third-party information provided on forms such as W-2s or 1099s.
• In going about our work in the enforcement area, the IRS realizes that many small businesses face substantial economic challenges, even as the economy recovers. We have worked diligently to communicate to our employees the importance of recognizing that individual taxpayers and businesses being audited may be dealing with financial hardships, and we have encouraged our employees to be flexible in these situations.

You can tune into the livestream of the hearing, which starts at 1 p.m. Eastern time, to find out exactly what additional info Graves and his colleagues want from Werfel.

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