If you’re the IRS and you want to keep the revenues flowing despite being in an environment of budget cuts and auditor staff reductions, what do you do? It’s not rocket science but more of a battle plan. What they’ve done is focus their auditor brigade on a more target “rich” environment. While total IRS audits have been down for the 5th straight year in 2016, audits of the wealthy have increased and the IRS even makes use of its own Wealth Squad to focus more on such efforts. With a focus on target rich environments, the IRS can squeeze more dollars out of each audit to offset the decline in volume of audits.
According to the IRS, the “goal is to improve return selection, identify issues representing a risk of non-compliance, and make greatest use of limited resources.” In addition, the IRS is making more use out of a targeted mass mailing of notices addressing specific issues. For example, they might send out a notice requesting proof for a large charitable donation deduction. Asking for documentation from the charitable organization to verify the amount and checking it against their list of qualified organizations.
Another common issue the IRS is looking at more with the rich is the “hobby loss” where income in a high tax bracket is offset with hobby income and expenses disguised as a legitimate business; but in reality, never really meant to make a profit. Raising horses, racing cars, a hobby farm, etc., are some examples. These are under IRS attack as well. It’s yet unknown how the new White House administration under President Trump (who’s been the subject of many an audit himself) will want to direct such efforts going forward.
Dale F. Jensen, CPA