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| It Was a Very Good Year - for IRS Audits, That Is! |
01-25-2007 |
On New Year’s Eve, it’s only natural to reflect on what we’ve accomplished during the previous 12 months. But this year, the Internal Revenue Service can celebrate an achievement that could make 2007 uncomfortable for some traders: IRS audits increased across the board.
IRS Commissioner Mark Everson released his agency’s 2006 fiscal year statistics recently, confirming what we at Traders Accounting have been saying for months: Uncle Sam is starting to get tough once again on tax avoiders.
The tax enforcement program may have gone south for a few years following the public spanking the IRS took around the 1998 IRS Restructuring and Reform Act, but three-and-a-half years under Everson’s tutelage, it’s back and ready to bite the careless and care-less among us.
Total individual returns audited in 2006 increased more than 6%, from 1.2 to 1.3 million, the largest number of audits since 1998. The revitalized enforcement corps roped in a record $48.7 billion, up 10% from the previous year’s record.
Not surprisingly, the IRS is concentrating its enforcement efforts at the uppermost rungs of the income ladder where they will reap the greatest return. Audits on individuals with incomes of $1 million or more were up in fiscal 2006 nearly 33 percent, from 12,800 to 17,000, covering about 6% of taxpayers in this category. Said the Commish: “If you’re earning that kind of money and we notice a problem, you’re going to hear from us.”
Tax scrutiny increased for taxpayers with incomes between $100,000 and $1 million, where audits were up 18 percent overall, from 219,000 to 258,000, covering 1.67% of taxpayers. This was the largest number of audits in this category in more than a decade, and more than double the 2001 total of 92,000.
Even those earning less than $100K annually saw their odds of an audit increase 4%, from 996,000 to just over 1 million, covering just under 1% of taxpayers in this category.
IRS Watches “Flow-Through” Entities
No trader likes to see audits on the rise, given the precarious nature of our unique trader tax status. More scrutiny could easily mean more uncertainty when it comes to planning and filing our federal income taxes.
But perhaps equally troubling is the government’s recent resolve to take a closer look at “flow-through” entities such as subchapter “S” Corporations and partnerships, a category the feds estimate has only a 50% compliance rate. Flow-through entities are so called because the tax liabilities “flow through” from the business to its individual members.
Audits of flow-through entities increased 15 percent in fiscal 2006, from 8,500 to 9,800, the highest level for this category since 1998. The good news: coverage still remains a low 0.37, or nearly a third what it was prior to 1998. By contrast, audits of small business corporations remained virtually flat at 17,800, and the number of large corporations audited in fiscal 2006 actually declined 2.2%, from 10,800 to 10,600.
Everson said his agency will take an even closer look at “flow-through” entities in the second phase of the IRS’s National Research Program compliance study. In the meantime, he has urged Congress to adopt legislation that requires third-party reporting of payments to unincorporated businesses, in an effort to stem their potential for abuse.
What will these trends mean in the New Year? It’s difficult to say for sure. Everson says he has no specific quantifiable goals where enforcement is concerned; he is focused instead on helping the agency work smarter, not harder, to identify its audit targets. And while the IRS has retrenched considerably since the doldrums days of 1998, questions remain whether Congress will provide Everson with the necessary funding to ramp up staffing and modernize the agency’s enforcement infrastructure.
But one thing is certain: In 2007, the IRS will be watching your returns closer than it has in years for signs of dodging, weaving and wiggling out of your tax obligation. If you have been tempted to go for that extra tax savings by pushing the limits of what the tax code allows, this would be an unwise time to do so.
A far smarter plan would be to make an appointment with Traders Accounting today for a New Year’s tax plan checkup. As the industry’s experts on trader taxation, we offer the most comprehensive, up-to-the-minute tax advice and strategies you need to stay ahead of the fast-changing tax landscape.
This New Year’s, resolve to keep your income in your brokerage account and out of the hands of the IRS. Call Traders Accounting today and make this the best New Year’s ever!
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