The United States has one of the highest tax-compliance rates in the world. In addition, the combined cost of noncompliance from underreporting, nonfiling and nonpayment is projected to be $450 billion annually. With an estimated U.S. deficit of more than $1.3 trillion, the IRS is testing some new techniques to close the federal tax gap and help reduce the federal deficit. The following areas are where the IRS plans to focus its efforts over the next decade:
Do more with less. The IRS’ budget was cut by $305 million for fiscal year 2012. Funny timing as it will now have more programs to administer with recently passed health care law. The IRS also plans to use technology for compliance initiatives and programs in order to close the tax gap.
Increase compliance rate to 90% by 2017. Doing so would reduce the current $450 billion tax gap by about 40% to $266 billion. Every 1% increase in compliance would generate at least $27 billion.
Focus on high-yield assessments. These areas include high-income individuals, worker classification, S corp. losses claimed in excess of basis, rental property losses and form 1099 fling compliance.
Increase tax document matching. Certain small businesses only have a 44% compliance rate because not all business revenue is subject to computer matching of tax documents. Automated compliance systems can produce significant ROI, which is why the IRS wants to increase computer match documents.
Simplify the code. Every year the Internal Revenue Code gets more complex, even so that some CPAs don’t understand it. Simplifying the Code would greatly reduce unintentional errors.
Regulate and deputize tax professionals. The IRS is spending resources in educating and regulating tax preparers to remove “bad players” in the tax preparation arena in order to raise the bar and increase compliance levels.
Mandate disclosures. The IRS has increased the level of detail tax preparers must include in their returns. Failure to make those returns can result in civil penalties and sometimes even criminal penalties.
The bottom line is that CPAs need to inform their clients that the IRS and other tax authorities are aggressively auditing tax payers, and that clients should expect to receive more notices and audits. The reason for this has little to do with how the return was prepared, but rather because they now have the ability to easily increase compliance with automated systems.
For more information, please visit AICPA.