PERSPECTIVE: THE IRS IN TRANSITION

"THE IRS MISSION STATEMENT"

PROVIDE AMERICA'S TAXPAYERS TOP
QUALITY SERVICE BY HELPING THEM
UNDERSTAND AND MEET THEIR TAX
RESPONSIBILITIES AND BY APPLYING
THE TAX LAW WITH INTEGRITY AND
FAIRNESS TO ALL (PUBLICATION 594)
 

The IRS has been on an administrative roller coaster for the past decade.  When the IRS Restructuring and Reform Act was passed in 1998 the new law profoundly impacted the IRS.  For several years the IRS was consistently inconsistent.  There were massive changes caused by the federal legislation and numerous directives from the IRS National Office.  Immediately after the Act was passed IRS seizures and levies were reduced dramatically.  The then IRS Commissioner, Charles O. Rossotti outlined a new administrative structure to accompliah the primary goal of emphasizing "service" to taxpayers.  In theory, taxpayers were to be treated as customers.

In 2002 IRS regional and district offices were completely reorganized.  While years ago Cincinnati was an important regional office at the current time it is simply an arm of regional and national office divisions.

Ten years ago the IRS was transitioning into a "friendlier" IRS.  The trend, however, since 2007 is an IRS return to its more traditional role of being the toughest creditor in the United States.

Congress has recognized that it must protect its tax revenue and the budget for fiscal year beginning 10/1/08 dramatically increased field Revenue Agents and Revenue Officers.  Generally, there are 25% to 30% increases in IRS foot soldiers in the Examination Branch, the Collection Branch and Appellate Branch.  Extensive training has been conducted and newly trained personnel are being phased in with training to be complete the first part of 2010.

The newly trained Small Business/Self Employed personnel are expected to be talented inasmuch as there are many qualified applicants due to the business downturn.  Many knowledgeable and education professionals have made the switch to government service.  Small and medium sized business entities will feel increased IRS enforcement efforts as will individuals, partnerships and limited liability companies who have international bank accounts.

IRS officials believe that there is a "revenue gap" with the IRS devoting immense resources to fill that gap.  The main focus will be the 41,000,000 proprietors who file Schedule C returns (proprietorship income tax returns) which are an attachment to their Forms 1040.  The Small Business/Self Employed Division is being charged with expanding audits of these returns as well as aggressive tax collection.  It is not the large corporations that are being newly targeted; rather smaller businesses.  This is not to say that large corporations are escaping scrutiny.  Fully 95% of the major companies in the United States are audited every year.

The new personnel assigned to the IRS Small Business/Self Employed Division will be looking at individual tax returns (Forms 1040), partnerships and LLCs (Forms 1065) as well as corporations (Forms 1120 and 1120S).  Projections are that Subchapter S corporations (Form 1120S) will be the second focal point for examination/collection activities - just after sole proprietorships.

Despite increased IRS efforts to collect taxes several administrative procedures set in place in recent years continue to offer taxpayers an opportunity to exercise their rights to avoid unreasonable IRS audit and collection practices.

1. Due Process Hearing rights under IRC 6630 insure that taxpayers have the right to a hearing before any IRS levy or seizure.  Judicial review of an unfavorable hearing results is also available in most cases.  See additional due process information in the Lien and Levy section.
2. Mediation procedures are in place for collection and audit issues.  The current environment allows for an independent third party mediator to insure that the IRS does not ride roughshod over taxpayer rights.
3. Post Appeals arbitration is now available in some cases.  Revenue Procedure 2002-44, 2006-2 C.B. 800 sets out formal procedures for arbitration.
4. Mediation and arbitration procedures are even available in trust fund recovery penalty matters and Offer in Compromise cases.  IRS announcement 2008-111, 2008-48 I.R.B. 1224.
5. Rules regarding non-responsible spouses have been clearly established.  Innocent spouse relief and injured spouse relief from spousal tax liabilities is routinely granted.  Tax Court jurisdiction exists to review an IRS denial of spousal relief. 

Here are some recent IRS audit statistics.  The audit trend line is up:

• In 2007 one in every 561 filed returns was audited.
• In 2008 one in every 448 filed returns was audited.
• One in every 118 filed individual income tax returns received correspondence from a Service Center requesting additional information/possibly leading to an audit.
• In 2008 1% of all Forms 1040 were audited (mostly correspondence audits) totaling 1,391,581 audits.
• In fiscal year ending 9/30/08 IRS budget expenditures were 41 cents for every dollar collected.