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| It’s BAAAACK! Are You Ready for a Kinder, Gentler Random IRS Audit |
08-28-2007 |
As traders, where would we be without research data? It’s the very lifeblood
of what we do. Without it, our trading would quickly grind to a halt, and world
markets themselves would soon follow. If, as iconic architect Ludwig Mies van
der Rohe observed, “God is in the details,” then data to a trader is the
equivalent of manna from Heaven. The Internal Revenue Service also is keenly
interested in research data. That’s because pesky parties such as Congress
insist on asking the IRS embarrassing questions, such as who is responsible for
the estimated $290 billion “tax gap” between taxes owed and taxes paid each year?
To obtain the data that it’s top-secret computer program needs to even attempt
to answer that question, the IRS has historically relied on the taxpayer’s worst
nightmare, the random audit.
However, due to the uproar over an excessively invasive random audit program
in the early 1990s, the IRS largely discontinued the practice in recent years –
until now. This fall, random audits are back, in what the IRS says will be a
kinder, gentler form of indiscriminate taxpayer torture. Beginning in October
and expected to continue on an annual basis, the IRS will randomly select 13,000
of the anticipated 136 million 2006 income tax returns from various income
categories for a closer inspection. The IRS is especially interested in tax data
about us, the self-employed, whose ranks it considers to contain the highest
percentage of scofflaws, tax dodgers and deadbeats. That finding, generated by a
limited random audit of 45,000 returns for the 2001 tax year, found plenty of
room for noncompliance among those of us who have no employer to withhold taxes
from our paycheck or report our income separately to the IRS. This would be an
excellent year, if you have not already done so, to consult with a Traders
Accounting tax professional. In fact, it could be a lifesaver if the IRS
happens to flag your return, whether randomly or for cause. Focus on S
Corporations, Capital Gains In concert with the new random audits, the IRS is
launching a separate study of S Corporations, the most common corporate entity,
which the fed suspects is the “inc.” of choice for tax dodgers. Because an S
Corporation is a “flow-through” entity, its profits (or losses) flow through to
the individual owners, who then report those items on their annual IRS return.
How much profit goes unreported among the S set? Inquiring IRS minds want to
know. So what’s kinder and gentler about this round of random audits? For one
thing, computer technology and IRS data capabilities have advanced since the
early nineties to such a degree that many randomly selected taxpayers may never
realize they’ve been flagged. Instead, the IRS will electronically extract its
findings by comparing your return to information about you in its databank. In
addition, if supplemental information is needed, you may be able to provide it
via mail instead of face to face in a case room over vending machine coffee.
Still, according to the IRS, the majority of random audits are expected to take
place in person. That may be especially true for self-employed taxpayers, on
whom the IRS presumably has less information and more reason to be suspicious.
And don’t be surprised if agents focus equally on large and small dollar amounts.
As Meis says, God is in the details, and the service considers itself about a
dozen years behind in collecting it. Under particular scrutiny this year is the
issue of capital gains. Congress and the IRS are convinced that investors are
inflating the cost basis of their stock and securities to trim their capital
gains exposure when they sell the holdings, costing the government billions in
lost tax revenue. Some in Congress would like to require brokers and financial
services companies to report what investors pay for stocks and securities.
Although some brokers and fund managers do track cost data, they are not
required to report it to Uncle Sam – yet. What’s your best hedge against the
threat of a random audit? Having a Traders Accounting tax professional in your
corner, of course. At Traders Accounting, we are both Certified Public
Accountants and traders. We understand the unique challenges and opportunities
that trader tax status affords our clients, and are skilled in the subtleties of
the current tax code and experienced in representing our clients in the audit
environment. An IRS audit may be random, but your response to it shouldn’t be.
Contact Traders Accounting today. We’ll help you build bulletproof tax records
and fully compliant, tax-maximized returns that will withstand any unwelcome IRS
scrutiny that may randomly come your way.
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